Smart Use of Credit Cards

The average annual credit card annual percentage rate (APR) has risen steadily over the past two years as the Federal Reserve has raised its benchmark rate in attempts to prevent recession. Though some sources have noted positive signs, rates remain high. 

For the cardholder who can pay off the total balance each month or the savvy shopper who pays equal installments on a zero-APR promotional offer, the benefits of using a credit card could be worth it. They’re a good choice when shopping online, because you can dispute the charge if something you purchase isn’t what was promised.

But for anyone leaving a balance on a higher-APR card for longer than one or two 30-day cycles, the interest charges can really add up, and the balance can take much longer to pay off. That’s because such a large portion of each payment is going toward interest.

Here are some things to consider if you’re thinking of applying for a credit card:

• Understand that your credit score is what qualifies you for the best credit card APR and rewards, including introductory zero-APR offers. So if your credit score is not optimal, work to improve it before opening a new credit card.
• Cards with rewards (such as an intro bonus, cash back or airline miles) sometimes have a slightly higher APR. Do the math to discern which mix of rate vs reward is best for you.
• Read the fine print and comparison shop just like you would on a car or home appliance. The features to consider include:
  • Length of introductory offer
  • APR after the intro offer
  • Annual fee
  • Rules for the rewards (Are there caps? Can they be pooled with or transferred to others in your household?)
  • For retail store cards, pay attention: Many use zero-APR promotions with deferred interest charged to you if you don’t pay off the full balance by the time the promotion expires.
• Resist signing up for cards on a whim. Having too many credit cards is difficult to manage and risks negative effects on your credit score. Take a deliberate, selective approach, perhaps even limiting use to things you already buy. If you take an annual summer trip, a card with travel rewards makes sense. For a large family with a goal of eating out less often, a card with cash back on grocery purchases may make sense.

Got your favorite card? Here are some tips for being smart credit card user:

• Set up automated payments from the start, either for the full balance or for an amount you can afford above the minimum payment. This builds discipline into your card ownership and can prevent late fees. For many zero- or low-APR introductory offers, late payments can result in your offer being cancelled early.
• Stick to your purpose to stay in line with your budget. For example, if you picked a card for its cash back on groceries, consider connecting the card to the grocery chain’s secure app and leave the card at home to prevent non-grocery spending on the card.
• Keep your eyes on your statements monthly at a minimum, not only to identify any fraud, but also to keep tabs on the balance.
• If you find yourself always reaching for the credit card, it may be time to or consider these suggestions on when to use debit card vs credit. And while carrying a credit card helps with pop-up emergencies if you’re stranded somewhere without an adequate cash source, an emergency fund is an important tool for paying off that emergency expense.
• Call the issuer to inquire about lowering your rate, especially if you’ve had the card a while and the APR has crept up over time. Loyalty and on-time payment history may help you negotiate some relief.
• If you end up with a sizeable balance that’ll take you a while to pay off, consider a transfer to different form of credit such as a home equity line, which could have lower rates. More of each payment will go to the principal, allowing you to pay the balance off faster and cost you less interest in the meantime.