The 3 Rules of Credit Cards
Updated: May 5, 2020
While credit cards are a crucial part of raising your credit score and attaining various rewards if you do not follow the rules outlined below, credit cards will not be worth it, and if fact, I probably wouldn’t recommend one to you.
However, if you promise to abide by these rules, I can assure you that a credit card will aid you in reaching some of your financial goals.
Rule #1: Don't Buy Anything You Wouldn't Have Otherwise
Just because you have the cash available at the moment, doesn’t mean that you won’t have to pay it off at the end of the month. Yes, I know that that sounds obvious, but today, the United States population has surpassed $1 trillion dollars. Now, does this mean that credit cards are bad? No, it just means that people are bad at handling credit cards and need to learn from it.
So, if there is a purchase that you wouldn’t have made otherwise without the card, then do not buy it. The point of the credit card is not to spend more, but rather to save more through rewards and build our score.
Rule #2: Keep Your Credit Utilization Ratio Low
This rule is immensely important if you are trying to raise your credit score with this card. However, I think it is a prominent rule that everyone must follow.
In short, a credit utilization ratio is the amount of money you spend divided by the available credit your credit card gives you. For example, if you have $5,000 of available credit per month and spend $1,000 on the card that month, you would have a ratio of 0.2 ($1,000/$5,000=0.2). In general, most professionals recommend keeping this ratio below .1 or 10%.
While this is one of the ways to raise your credit score, I think that this one is the most important for credit card users.
Rule #3: Pay Your Bill Off In Full Every Month
Now, there is no discussion on this rule. The whole point of getting a credit card is to gain cashback or rewards on your everyday spending. Now, if you do not pay off that bill at the end of every month, the interest you owe the credit card company will offset any of the rewards you might have earned.
Sadly, many people do not follow this rule. It might be because of emotional spending or maybe it is because people don’t truly realize how much interest they are paying on late payments.
Now, if you are in credit card debt, I highly recommend reading my post on how to get out of credit card debt.
Where To Go From Here
If you have decided that a credit card is a right decision for you, it is now time to decide on a credit card. There are thousands of credit cards on the market today with all different types of cash-back rates, rewards, and fees. If you are a beginner, I just recently published a video on the best credit card for beginners, so make sure to go check it out.
Disclaimer: I am not a financial advisor, so please review all of this advice with your CFP or financial advisor first.