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The Right Way To Use Your Credit Card

Posted on November 20, 2015

Building and maintaining good credit is essential, and the best way to go about that is using your credit card responsibly. It’s too easy to abuse the privilege of credit, but if you fall victim to its allure and don’t manage it correctly, you could get into real trouble. There are smart ways to use a credit card in order to gain the most benefit from it. Here are some tips and tricks on using your card and how to pay it back sensibly. The secret? Take advantages of the perks and avoid the penalties, says Bankrate.

1. Don't rack up costs. When used wisely, credit cards can help you benefit from what is essentially a free short-term loan on purchases you need. To do this, you have to keep your balances low and pay them off every month. Carrying a balance means paying high interest rates, which is the quickest way to fall into the hole of debt.

2. Pay on time. By making your monthly payments by the due date, you’re avoiding those high penalty fees as well as penalty-rate increases. Some rewards cards will even take away the privilege of accruing rewards such as points toward free miles, gas and gifts. You may even lose the rewards you’ve already built up, with the option of paying a fee to get them back. Late payments also ding your credit score, which can be very hard to bounce back from.

3. Don’t get a cash advance. It’s understandable: it’s the weekend and you need cash. You may consider rolling up to the ATM to take out some money on your card, but resist the urge. Not only will you pay sky-high interest rates, you’ll also pay high fees for the privilege. In addition, the cash advance amount is the last to get paid. Why? When you send in a payment, the money goes first toward the interest, then the purchase amount, then whatever is left over goes toward the principle amount of the cash advance, says The Motley Fool.

4. Don’t max out your cards. When you spend up to your credit limit, you’re already at the point of no return: there’s no line of credit from which to rely on when an emergency hits and you're facing enormous fees if you go above the credit limit. Even if your purchases technically don’t take you to the limit, the interest could put you over the edge. Most experts agree to either pay off your balances every month or keep them at least at 50 percent of your total credit limit.

5. Make more than the minimum payment. The minimum payment on your bill is merely the lowest possible amount you must pay in order to stay in good standing with your credit card company. However, when you look closely at your bill and how it breaks down, that minimum barely covers the cost of your interest charge. If you only pay that amount, with only a small portion going toward purchases, it’s like taking one step forward and two steps back every month. It’s wise to pay at least double the minimum payment each month so you can stay on top of your balance and pay it down quickly. Let’s say you have a balance of $5,000 at 14 percent interest and two percent minimum payment. If you only did the minimum each month, this amount will take you 22 years and $5,887 in interest to pay off. If you increased your payment and paid $125 every month, you could have it paid off in just six years with less than $1800 in interest.

Being wise about your credit card spending will only serve you well. The take-away here is to not let your balance get away from you, and be smart about how you pay it down.

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