Get Credit When Credit is Due

December 09, 2020
Cheryl Langston, CFP®
By Cheryl Langston, CFP®

Credit cards offer convenience and safety for purchases. During this pandemic, credit card transactions are an even more attractive option for contactless payments. However, consumers need to make sure their cards are managed appropriately. Accumulating desired perks is attractive, but maintaining credit scores, minimizing interest costs and fees, and managing balances are more important. Below are a few guidelines for using credit cards to your advantage, while still being a responsible consumer.

How high should I go?
While you may have room on your credit card for a purchase, you should be mindful of extending balances beyond 30 percent of your credit limit. Once this happens, your credit card company could view you as a high balance risk, which may negatively impact your credit score. For example, if you have a credit card with a $25,000 limit, you want to keep your outstanding balance under $7,500. Your goal should be to keep this balance-to-limit ratio, also called the utilization rate, as low as possible.

What is the right amount to pay on my credit card?
The best strategy is to pay your entire balance each month, ideally before the due date. This practice avoids late fees, interest charges and accumulated debt balances. You do not need to carry a balance on your credit card in order to build good credit history. Lenders look for account usage and timely payments when reviewing credit history. 

If paying the entire balance is too much of a stretch, or you have a temporary cash flow crunch, pay as much as you can afford without stressing your budget. Pay at least the minimum due on your credit cards. If you have multiple credit card balances, there are a few strategies to conquer credit card debt. Work with a financial professional if you need guidance.

If you experience job loss or other interruption to income, call your credit card company as soon as possible to explain your situation. Most credit card companies will work with you if you have a loss of income or a medical situation causing an unexpected financial hardship, especially if you have a history of paying on time and have previously used your credit card responsibly.

What should I charge to my card?
Since credit cards offer certain advantages when paying bills, here are a few examples of when it makes sense to pull out the plastic:

  1. Online purchases - Online credit card purchases can give you more protection against fraudulent charges. Make sure to use your credit card on websites you trust, from a private, secure internet connection. 
  2. Hotel and car rental reservations - Most hotels will require a credit card be on file, even if you opt to pay cash for your stay. The same type of hold can occur when you drive off in a rental car worth thousands of dollars. These holds can be problematic if using a debit card where all funds in your account could potentially be tied up. Additionally, your credit card may offer primary rental car insurance, allowing you to opt out of the rental car company’s insurance which can be $10-$20 per day.
  3. Restaurants - If you can stay on budget, using your credit card when eating out can be beneficial. While some folks opt to use debit cards to pay a restaurant tab, I do not like giving my debit card to anyone who walks away from me to process a transaction. While credit cards can be scammed too, most of the major credit card networks offer zero fraud liability for their credit cards. 
  4. Gas Stations - You can face the same risk when using a debit card to pay for gas. Scammers often target gas stations and can easily obtain PINs, potentially wiping out any account associated with a debit card. Furthermore, many credit cards will offer additional rewards for gas station purchases.

Expenses to typically avoid charging to your card are mortgage payments/rent, taxes and medical bills. 

Monitor your credit card 
Review your statement and point balances regularly, making sure all charges are legitimate and correct. Save restaurant receipts and verify tip amounts. Also look for unfamiliar charges or additional service fees that you may not have authorized, or free trials that have moved into the payment phase. In general, it is a good idea to review services and subscriptions being charged to your card. If you are not using or do not see a benefit from continuing the service, contact the company to cancel.

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