smart-spenderCredit cards often get a bad rap. They’re evil. They can destroy your family’s finances. They can ruin your credit.

While all these things can happen, they occur most often because of poor financial habits and abuse. Credit card users can show healthy habits too. Consumers can responsibly use credit cards if you want to use debt, build healthy habits, and subsequently use credit for bigger and better things, like a home mortgage.

Creating great habits with your credit cards will, in turn, help you build a healthy credit history and credit score, which in turn allows you to move on to more serious financial goals like owning your own home. Here are seven things that you can do to help you to build healthy habits while using credit cards.

1. Pay Off Your Credit Card Each Month
There are many times when you will need to use a credit card. You should protect yourself by using a credit card instead of a debit card linked to your checking account in many instances like renting a car and staying in a hotel. Many of these businesses place large holds on your credit or bank accounts.

If you use debit cards in these instances, you can often find yourself struggling with a cash flow problem. You could bounce checks if you’re not careful and have a large buffer. These are instances where using a credit card may be worthwhile. But, you will also want to strive to pay off your credit card balance each month.

Paying off your credit card balances each month can help you build a great credit score. It is also a way to develop healthy habits with respect to credit and debt. You might also want to consider only using one credit card. Then, you will only have one card to pay off in full at the end of each month when you receive your statement. You can also build reward points by focusing on one credit card with the best credit reward program.

2. Pay More Than the Minimum Monthly Payments
If you want to have healthy habits with credit cards, you shouldn’t keep a credit card balance every month. But, if you do, then you should pay more than the minimum monthly payments.

The minimum monthly payments are designed by credit card companies to help you only pay off the interest rate and 1% to 2% of your outstanding balance. By just paying the monthly minimums, it will take you years to pay off your debt.  It’s a good idea to at least cover the finance charges in order for balances to go down.

3. Don’t Use Too Much of Your Available Credit
The three national credit bureaus and the Fair Isaac Corporation, the creators of the FICO score, use credit utilization as a key metric in determining your credit scores. Your credit score will suffer if you use too much of your available credit on your credit cards. If you have a high credit limit on your cards, it’s not always the best thing for your credit score to test those upper limits.

For example, if you have a credit limit of $4,000 and have an outstanding balance of $3,000, you have an available credit of 25%. You’ve used 75% of the available credit. Most financial experts and the credit bureaus like to see consumers with utilization rates of 30% or less of their available credit.

4. Use Other Types of Debt
It takes more than just credit cards to build a good credit score. The credit bureaus also look at what kind of debt you have. Borrowers with healthy credit card habits also have a mix other types of debt.

Do you have a mortgage? Do you have a store credit card? These are other types of debts that the credit bureaus consider when calculating your credit score. A mix of debt types can lead to a good credit score and help keep building healthy credit habits.

5. Don’t Have Too Many Credit Cards
It sounds like a “no-brainer.” Don’t have too many credit cards. Trimming down the number of credit cards you have can be an example of healthy credit card habits. But, how many credit cards are too many?

Do you have credit cards that you’re not actively using? Do you forget to update your new mailing address with credit card companies you seldom use? You can potentially become a victim of identity theft if you’re not careful.

Too many credit cards can also damage your credit report. I’ve also found that some of my credit cards now require an annual fee. They didn’t have one during the first year. But, now they do. If you forget to pay the annual fee because you don’t use that card, you could run the risk of damaging your credit score when the credit bureaus report missed payments.

6. You Must Know Your Credit Cards’ Interest Rates
If you want to pay off your credit card and other debt, you have to know how much you are paying in interest. You need to know your annual interest rate or APR that you pay each month on your credit cards.

Many financial experts recommend that you start paying off your credit card debt with the cards that have the highest interest rate. Of course, you have to know your interest rates to do this.

You should list all of your credit cards, which can be a part of your family’s net worth calculations. As soon as you lay out all of your debt and the similar interest rates, you will know which ones to tackle first.

Many debt reduction plans require you to pay the minimum monthly payments on all of your debt. But, then you pay as much as you can with the disposable income from your budget on the credit card with the highest interest rate.

As soon as you pay off that card, you take that same payment and apply it to the minimum payment that you were already making on your credit card with the second highest interest rate. This method allows you to flow additional payments into the each subsequent card, building up a significant amount each month as you continue to pay off your credit cards one by one.

This method is slightly different than the debt snowball repayment plan, which targets your credit cards with the lowest balance first. While the initial balances and order are different for these two methods, the thought process behind paying off your debt is the same. You continue to build up the amount you pay on each subsequent card with the new freed up cash flow from the previous debt repayments that you’ve completed.

7. Budget for your credit card payments
A responsible credit card owner knows how much they have in credit card debt and when the minimum monthly payments are due. You credit card payments should be a line item in your family’s monthly written budget.

Having a placeholder in your monthly budget for your debt will help you to pay off your credit cards. Putting your credit card payments in your budget is a healthy way to have debt.

Credit card users can have healthy financial habits with debt and correctly using credit cards. Using credit cards the right way can help you build your credit history and then qualify for loans that you need to make larger purchases for items such as a home mortgage. Creating healthy habits with your credit cards will help you move on to more substantial financial goals.

 

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