Be ‘smart’ when using credit cards

Credit cards give you purchasing power, a safety net for emergencies, and a means to build your credit. But, if you don’t use them wisely, they can quickly become a source of chronic worry. There are healthy ways to use your credit cards, and here are a few:

SMART: Pay off your balance every month.

WHY:

•You are borrowing money interest-free, as long as you pay before your grace period ends.

•You can rack up rewards without paying a penny in interest charges.

•You’re building a positive pattern of behavior on your credit history: You’re borrowing money and paying it back consistently, proving to current and future creditors that you can be trusted with larger amounts of credit.

•You’re spending within your limits. If you have a prearranged agreement with yourself to pay off your balances every month, you’re less likely to go wild and splurge. Spending beyond the limits of your income can get you into trouble fast — save yourself that trouble by paying off your balances within your grace period.

SMART: Pay on time.

WHY: You’ll save yourself money on late fees, and you’ll protect your credit score. The biggest factor in calculating your credit s core is your history of payments: It accounts for 35 percent of your FICO score. A bad mark on your credit report sticks around for longer than you might think: Past-due payments that are reported to credit bureaus stay on your credit report for seven years. Show that you’re responsible with your credit, and pay on time.

SMART: Keep your balances low or nonexistent.

WHY: If you carry a balance past your grace period, you will be paying interest charges. It’s money that can be used for your car, your mortgage, or any other needs. Save yourself money by keeping your balances as low as you can.

There’s another reason to keep your balances low. The amounts you owe determine 30 percent of your credit score. With credit cards, your balances are measured against your credit limits: As you use higher amounts of your available credit, your credit score falls. As you pay off your credit card debt and your balance falls, your credit score rises. If you must carry a balance, try to keep it low, beneath 10 or 20 percent of your credit limit. If you can, pay off your balances entirely.

SMART: Keep your accounts active: Use credit cards once every few months on a small purchase, and pay off the balance immediately.

WHY: If you’re keeping a credit card for emergencies, there’s a chance you haven’t used your card for a long while. There’s a drawback to completely forgoing credit card use: a credit card issuer can use your inactivity as a reason to close your account.

If you lose your account, you’ve not only lost your emergency safety net, but your credit score may take a hit.

Once every couple of months, dust off your cards, buy something small, and pay off the balance quickly so you don’t pay interest charges. You’ll hang onto your credit limits and your score.

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

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