Credit cards can help build your credit history and improve your credit score, but they come with some pitfalls to avoid. Hanna from 3Goats has seven rules for using credit cards to help you stay on track and get the most out of them.
- Have at Least Two Credit Cards
Hanna suggests having at least two credit cards from different issuers (banks or credit unions). This way, if one issuer reduces or eliminates your access, you still have the other card. This also ensures access to credit if one card is stolen or compromised. Paying the balance in full each month on two cards will help build your credit history and improve your credit score.
- Pick the Right Types of Credit Cards
If you pay your credit card bills in full each month, consider applying for a cash back credit card. Some cards offer a flat 2% back on each purchase. If you need to carry a balance, shop for the lowest fixed APR to minimize interest charges. If you are a frequent traveler, look for travel rewards cards that fit your travel habits.
- Keep Balances Low and Pay Your Bill in Full Each Month
To improve your credit score and save money, keep your credit card balances low and pay your bill in full each month. This keeps your credit utilization low and helps you avoid interest charges and late fees.
- Know Your Interest Rate
If you pay your balances in full each month, the interest rate won’t matter. However, if you need to carry a balance, know which card has the lowest interest rate to minimize the interest you pay. Consider credit unions for the best fixed-rate APRs.
- Don’t Use Balance Transfer Cards for New Purchases
If you open a credit card for a 0% APR balance transfer period, don’t use that card for new purchases. Mixing the two can lead to new debt that isn’t eligible for the 0% period, defeating the purpose of the balance transfer.
- Avoid Closing Old Credit Card Accounts
Don’t close old credit card accounts. Closing them can shorten the average age of your credit lines and lower your available credit limit, both of which can negatively impact your credit score. Keeping these cards open helps maintain a positive payment history.
- Keep All Credit Card Accounts Active
To avoid issuers closing inactive credit card accounts, use them in your monthly spending. Make small recurring purchases, like a streaming service, and set up automatic payments. Alternatively, set a calendar reminder to use your card at least once every six months.
Final Thought
If you follow Hanna’s rules and use credit cards responsibly, you can build a good credit score that will benefit you when applying for things like an auto loan or home mortgage. However, if you find credit cards lead to overspending, Hanna advises using cash instead to reduce spending and avoid debt.
