If you do, be careful. Not only can you quickly get yourself into some pretty big trouble with debt, it’s sometimes underestimated how being responsible with credit cards can save you money in the long run.
How is that so?
Your use of credit cards as well as other loans are the “tests” you undertake to see how creditable you are with your money. In other words, the bank or financial institution is taking a risk by giving you a temporary loan, and they want to see how good you are at paying them back. Hence, you are building a credit history.
Don’t take your credit history or credit score lightly! Having a great record and a high score will give you access to loans for your house or car when you need them. In addition, you may also get preferential rates.
Over time, all of these things can end up saving you a bunch of money. For example, I’ve been able to refinance my home mortgage thanks to using credit cards wisely and building up excellent credit. This in turn keeps my household budget intact so that I can put our income towards other goals such as retirement savings.
So with that said, here are 21 ways that being responsible with credit cards saves you money in the long run.
1- Only spend what you can afford.
Credit cards can make spending a breeze! I absolutely love the convenience of using them. All you have to do is “swipe”. Plus, you never have to carry any cash on you.
… But perhaps this “ease” of use is what can also get us into trouble. Credit card companies know that the easier they make it for you to spend, the higher your balance and more likely that you will rack up interest. And then its payday for them!
Don’t do that. Use your credit card responsibly by always spending ONLY what you can afford.
My rule is simple: If I couldn’t just simply pay for the item with cash, then I’m not going to buy it with my credit card. Then that way when the bill comes, I know I can readily pay it off.
2- Never-ever let interest accrue on your credit card.
Credit card interest rates and some of the highest interest rates that most of us (sometimes unknowingly) agree to.
Again, this is a point that’s worth repeating: “Interest” is how the credit card companies make their money. It’s how they get paid!
They’re hoping you slip up – even if it’s just once. Because if you do, then they will get 20 to 30% on the balance you owe. That’s a lot of extra money to pay for things that you could have just paid cash for.
Therefore, don’t let it happen! Make a pact with yourself to always pay the balance on your credit card in full each and every month. No exceptions!
3- Build up your credit.
As we already mentioned: The byproduct of using your credit card responsibly is that it will greatly improve your credit score.
A great credit score will not only qualify you for certain major loans like for mortgages and vehicles, but it will also get you better interest rate too. The last time my wife and I went to go buy a vehicle, we got a superior loan rate – thanks to the fact that we both have terrific credit scores.
So how do you do that?
Use your credit regularly, but not too much. Keeping your card in your top dresser drawer is not going to help your credit history. Instead, use it for your everyday purchases. Just don’t go too crazy. Most sites will recommend not exceeding more than 30% of your monthly limit. So if your credit card limit is $10,000, keep your monthly balance under $3,000.
4- Take advantage of 0% rate offers.
Okay. So maybe you’ve hit a few bumps in the road and accumulated a little bit of credit card debt.
What can you do about it?
One solution is to find a different credit card with a 0% introductory rate, and then consolidating your debt onto that card. Once you do this, you can then comfortably pay off the debt in reasonably-sized chunks without the fear of continuing to rack up interest.
Just be sure to make sure you pay off the entire balance before the term expires. Otherwise, you’ll be right back to where you started accruing more high-interest debt.
Also remember that even though the interest rate may be 0% for a limited time, there will still likely be a price to pay. Usually there is some kind of transaction fee.
5- If you can’t consolidate it onto another card, consider a consolidation loan.
Sometimes consolidating your debt onto a 0% rate card won’t be an option.
When that happens, the next place you could turn to will be a consolidation loan. Unlike the 0% credit card, the loan will likely be set to some nominal rate. However, it should be much less than the high-interest debt your trying to pay down.
6- Don’t arbitrarily switch balances from card to card.
As you get new credit cards with better interest rates, be careful not to casually transfer balances between cards. Again – those transaction fees will pile on and really start to add up.
7- Pick cards with rewards that suit your spending habits.
One of the best things about spending responsibility with credit cards is the fact that you can rack up rewards – a TON of rewards if you’re really clever.
However, to do this efficiently, you’re going to want to get a card that has rewards for the things you buy already. For example: When I was in college, I found an offer for a credit card that gave 5% cash back on tuition fees. Whenever my $4000 tuition would come due, I’d put the whole thing on the card. (Why not? I was going to write a check for it anyways.) From that one transaction I’d earn $200 cash back. Awesome!
There are credit cards with rewards points for literally any kind of spending category: Travel, groceries, gas, etc. Check a site like Nerd Wallet to browse the latest offers.
8- Maximize your credit card rewards.
If you’ve got 5-star discipline when it comes to paying off your credit cards each and every month, then why not put as many of your everyday expenses on there as much as possible? That way you will rack up points on everything you buy!
I’ve used this trick for years to completely maximize our rewards, and it’s worked like a charm. Literally every purchase of $5 or more will go on one of my credit cards.
9- Auto-pay your bills with your credit card.
I’ll even go so far as to pay off my other bills (like my home energy, cell phone, garbage, etc) with my credit card. I was going to pay them off anyways!
Again – this technique only works if you plan to be 110% responsible and pay off your balance in full every month. Slip up once, and those rewards will pale in comparison to the high interest you’ll soon owe.
10- Never pay for credit.
If a credit card has an annual fee, skip it. There’s no reason to ever pay to have a credit card for everyday purchases.
The only exception to this rule is when you’re using an advanced rewards-gathering technique called credit card arbitrage. This is where you get certain credit cards specifically based on the rewards they offer, even if they have annual fees.
For example: Once time I got a credit card from Chase that had a $450 annual fee. Crazy! I know. However, the card came with 100,000 Chase points (worth $1,000 in cash or $1,500 in travel) and $600 in travel reimbursement. We applied for this card because we were specifically planning to use it for an upcoming vacation we were planning. So even though that ridiculous $450 fee seemed high, getting $2,100 in automatic rewards made it totally worth it.
11- Get your credit score for free.
When was the last time you saw your credit report?
If it’s been a while, don’t worry. You don’t have to sign up for credit monitoring services or any nonsense such as that. You can get a free copy of your credit report from AnnualCreditReport.com.
If it’s your credit score you’re more interested in knowing, you can also find out your credit score from MyFICO.com. Keep in mind that sometimes certain credit cards will tell you your credit score for free. For example, my Discover card reports my score every month in my statement. Kind of a nice perk!
12- Fix any errors on your credit report.
When you do download your credit report, be sure to go through each line and look for errors or questionable entries.
Hey – mistakes happen! Or worse, someone might be dipping into your pockets. Either way, it’s going to work out badly for you. So don’t take that! Isolate the issues and report them to the agencies.
Again, improving your credit score will give you the opportunity to qualify for loans when you need them. And you’ll get better rates than everyone else.
13- Don’t pay an agency to “fix your credit”.
Ever heard those fly-by-night commercials of agencies that promise to fix your credit? Guess what? They can’t. It’s just a total waste of your money.
You can’t just “pay” away your problems. A firm can’t fix your problems. When it comes to your credit, only you can fix it. That means just stopping what you’re doing and being responsible with your credit from this point onward.
14- Don’t be so quick to close your credit cards.
Okay … walk with me on this one.
If you’ve got credit cards that you’re not using, it seems pretty logical to just call up the company, cancel the account, and cut up the card. Right?
Wrong. It actually hurts you to close your credit cards. Why in the world is that? Because one of the factors that influences your credit score is how much credit you have available to you. Therefore, when you close your accounts, you decrease your total amount of credit available. And then your score goes down.
I know it seems very counter-intuitive. But that’s the way this crazy credit score game works.
Despite this point, just make sure you cancel the ones with annual fees (in case you didn’t take my advice earlier). Again – unless you’re using a super-advanced strategy to maximize your rewards points that includes a card with an annual fee, then cancel it. You shouldn’t have to pay to have a credit card.
15- Minimize your credit checks.
Another factor that can drop your credit score and reduce your opportunities to get the best deals – the number of times your report is pulled.
Why is this perceived negatively? Because if you’re always applying for credit, then you can create a perception of someone who needs the money really bad, and could perhaps be a risk.
So therefore, play it cool! Never let anyone run a credit check on you until you are absolutely ready to buy. This is particularly important when you’re shopping for a loan.
When I went to refinance our mortgage, literally everyone I called was chomping at the bit to run my credit report and get my application going. Put the brakes on. Don’t give anyone your Social Security number, and just tell them all you want is ballpark estimate. This way your credit stays intact.
16- Don’t be tempted to use your credit card in an emergency.
If you’re in trouble financially, a credit card can sure seem like a quick and easy fix. But DO NOT be tempted to do that. Throwing unexpected emergency purchases on your credit card will be a fast way to rack up charges. That means a higher likelihood that you will also rack up interest. And you know where that leads you …
Don’t go down that road! Instead, do what everyone recommends and start an emergency fund. If you can save 3 to 6 months worth of income in your savings account, that would be ideal. Even if you can just set aside $1,000, that’s still better than nothing.
17- Ask to lower your limit.
If you’ve got doubts about your own ability to keep your credit card spending to a minimum, do the smart thing – ask them to have your available credit limit lowered. Just like a person on a diet throwing out all the junk food in their house, lowering your limit will help you to self-regulate how much you can spend.
18- Negotiate a lower interest rate.
If you think you might ever rack up interest, strike first! Call your credit card company and see if they can lower your rate. Your rates are not set in stone. The company can make them whatever they want them to be. Give it a shot and see what they can do for you.
One trick that might help leverage the situation is to let them know that a competitor’s card has given you a better rate. Companies hate to lose their customers, and so they might be more willing to make an exception if you let them know.
19- Skip the cash advances completely.
Cash advances are bad. Just bad. At rates like 30%, you should avoid them like the plague.
20- Don’t use those “free checks”.
Does your credit card company ever send you “free checks” in the mail? If they do, rip them up! These are just another way to trick you into the cash advance scam. Don’t fall for that trap!
21- Never rack up late fees.
Just like interest, late fees are totally within your control and can easily be avoided. Make your life easy by switching to automatic payments. That way, you’ll never miss a payment ever. I have all of my credit cards set to auto-pay, and it’s a total load off our shoulders knowing that they payments will always take care of themselves.
Featured image courtesy of Flickr