Presented by Nancy J. LaPointe, MBA, CPF®, ChFC®, CLU®, CASL®
Credit cards can help you build credit history and, if managed properly, help improve your credit score.
Tip #1: Pay on time. By paying on time, you not only avoid late fees, you may also avoid an automatic increase in interest rates going forward. In addition, paying on time can maintain or improve your credit score, which can qualify you for lower rates.
One easy way to ensure prompt payment is to schedule an automatic transfer from your checking account, preferably seven days before the bill’s due date...or even earlier. Paying earlier has its benefits. If you carry a balance, paying early can reduce your monthly finance charge and the balance reported to the credit reporting agencies.
Tip #2: Keep your balance at no more than 10 percent of your credit limit. Make a habit of keeping your credit card balances at less than 10 percent of the card’s credit limit. Although a balance within the range of 10 percent to 35 percent of your limit is an acceptable “utilization rate,” maintaining a lower percentage can improve your credit score. Remember, even if you pay off your balance monthly, you can still have a high utilization rate. If you are trying to improve your credit score, consider using cash for new purchases to give yourself time to add points to your score.
Tip #3: Avoid unnecessary costs. Some credit cards provide overdraft protection if you go over the credit limit, but consider the consequences. Not only will you pay interest on the overage, but you will also be charged an overdraft fee, typically around $30. If the overdraft feature is important to you, avoid the fees by paying the balance in full before the due date.
It is also beneficial to increase your normal monthly payment to help wipe out cash advances you may have taken. Here’s why. Credit card issuers may charge different interest rates for different types of balances carried on the same card. Typically, cash advances incur the highest interest rate while balances transferred to the card are charged lower promotional rates. When you make a payment above the minimum amount required, the card company applies the minimum to the portion of your balance that incurs the lowest interest (i.e., transferred balances). Then, any amount paid in excess of the minimum is first applied to the debt with the highest interest rate (i.e., cash advances).
Tip #4: Read your mail. The flyers that come with your bill often give you notice of pending changes. You probably understand that variable rates can change anytime. But did you know that the issuer can also increase your rate because of a change in your credit rating? In both cases, you must be notified, and your credit card company must review your account every six months to determine whether you qualify for a decrease in rates.
Even fixed rate cards can hold surprises. The card issuer has the right to increase fixed rates if the required minimum payment is not received within 60 days of the due date.
Tip #5: Pay more than the minimum. Paying only the minimum monthly payment is a costly mistake. At 1 percent to 4 percent of your balance, the minimum payment barely covers your interest charges, leaving little if any of your payment to reduce your balance. At that rate, it could take decades to pay off your balance! But you can take control.
Credit card statements now disclose how long it would take to retire the debt if you make only minimum payments and how much you will pay in total interest over that time period. They also show you how much you would have to pay each month to retire the debt in three years. Make it your goal to at least pay the three-year payoff estimate. And make it automatic. Through online banking, you can arrange to have your checking account transfer a set amount to your credit card monthly.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Nancy J. LaPointe is a financial advisor located at 4520 Intelco Loop Ste 1 D Lacey, WA 98503. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 360 628 8175 or at [email protected]
© 2013 Commonwealth Financial Network®