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How To Select, Manage And Protect Your Credit

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Steve's Market Commentary

If not used properly, credit cards can stand in the way of your financial well-being and happiness.

Last week, I spoke about the checklists I have created over the years and outlined key points related to estate planning and online security. This week, I want to wrap up with pointers on how to select, manage and protect your credit cards and credit score.

Now, we all use credit cards because they are convenient, way more safe than carrying cash, and offer rewards such as points earned, etc. But, if not used properly, credit cards can stand in the way of your financial wellbeing and happiness. So here are a few things to consider when it comes to credit cards.

First off, know that every time you apply for a credit card, your credit score is impacted because there is a new credit inquiry applied to your history… I know this doesn’t make sense but that’s just the way credit monitoring agencies are setup. So make sure you don’t apply for too many credit cards because that is a red flag and could make your credit card interest rate go up.

There’s also something called your average credit age which is simply the average age of all of your accounts. So opening a new account and making a major purchase on that new account could have a significant impact on your overall credit score – and impact your borrowing costs on other items such as home mortgages, cars, etc. So manage your credit cards wisely… in a manner that creates a positive payment history and helps repair or restore a damaged credit score.

Choose a Card That’s Right For You

I also want you to reflect on your spending habits and how you plan to use your card… because this will help you decide which aspects of the card issuer’s offer to focus your attention on. For example,

  1. If you intend to pay your bill in full each month, look for a card with no annual fee and a generous grace period for late payments.
  2. If you plan on transferring or carrying a balance, look for the lowest interest rate and a low introductory rate.
  3. If this will be your primary credit card where you make most of your purchases, look for a card with a generous credit limit and a rewards program that has value to you.
  4. Finally, if you plan to only use the card for emergency purposes, look for one that offers low interest rates and low fees.

Understand the Card’s Fees and Penalties

Here’s another thing you should know before you run up charges on your card. Determine the annual percentage interest rate or APR. Fixed-rate cards typically have the same interest rate from month-to-month, while variable rate cards can fluctuate. Also, certain events, such as repeated late payments or charges beyond your limit, could trigger an increase in your interest rate, even if you started out with a fixed rate

On that point, also know your credit limit… which is the maximum amount the card issuer is willing to let you borrow. Based on your credit history, this could vary from a few hundred dollars to tens of thousands of dollars. So you should avoid maxing out your credit card to avoid negative impacts to your credit score.

Know your card’s fees and penalties – because these can quickly add up and literally lead to financial ruin if you’re not careful. Common charges include fees for transactions such as balance transfers and cash advances, and penalties for late payment and going over your credit limit. And remember, you always pay interest on unpaid fees and penalties… and compounding could come to bite you where it hurts!

Understand how charges are calculated, specially if you are going to carry a balance. The math here is fairly simple – just add your daily balances and divide the total by the number of days in the billing cycle.

Weigh the value of incentives. Many card issuers offer reward programs but the key is to determine if you will actually use the perks they offer. Further, understand where you earn points and where you don’t because issuers are clamping down on rewards and are tilting them to favor their most valuable customers… the ones that help card companies generate the highest fees with the lowest amount of risk. If the incentive is valuable to you, make sure the issuer makes it easy to track what you have earned and redeem your rewards.

Diligently Review Your Monthly Statement for Errors

Credit card offers are typically dangled in front of you, with rewards for immediate registration. Resist the temptation to make a quick decision. Instead, take the time to do a meaningful analysis of the offer and the role this creditor will play in your financial life.

Finally, commit to a diligent review of your monthly statement. Mistakes happen more often than you may think, and errors often go unnoticed. So hold on to your receipts and verify their accuracy on your monthly statement. It takes a little organization and patience but it’s an excellent exercise to help you understand your spending patterns, get motivated to save more and make sure you’re not being overbilled.