When it comes to managing money, there's one area many Americans have trouble with: credit cards. Americans are in lots of credit card debt, and unfortunately far too many of us carry a balance on our cards.
Your credit cards can end up costing you a lot of money if you get deeply in debt, and it takes you a long time to pay it off. And the decisions you make when it comes to credit card use can impact your credit score, which affects every aspect of your financial life.
You don't want a lower credit score or high credit card bills that derail your financial goals, so it's important to live by a few simple rules when it comes to your cards. In fact, here are six credit card rules you should know by heart.
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1. Pay your balance in full every month
If you pay your credit card balance in full every month, you don't have to pay any interest on your purchases. But, if you don't pay off your cards, you'll get stuck owing interest -- which makes each purchase on your card a little more expensive.
Interest rates on most credit cards tends to be pretty high, and interest typically compounds daily. This means each day the accrued interest is added onto your principal balance, so you pay interest on the interest until the debt is paid.
If you carry a balance one month, it will be harder to pay off your balance the next month because you'll now owe the outstanding debt amount, plus interest, plus the cost of any new purchases you charged. It's likely your balance will just keep growing, and you can quickly become trapped in credit card debt that will take years or even decades to repay. Avoid this by not charging more than you can pay off when your statement comes.
2. Don't max out your credit cards
Maxing out your credit cards -- or charging up to the credit card limit -- is a bad idea.
Not only will you end up with a high balance that it could be harder to pay off, but you could also hurt your credit score. That's because maxed-out cards have an adverse impact on your credit utilization ratio, which is one of the most important factors that determines your credit score.
Credit utilization ratio is calculated based on the amount of credit you've used versus the amount available. If you have charged $300 on a credit card with a $1,000 limit, you've used 30% of available credit. To avoid hurting your credit score, you'll need to keep your utilization ratio below 30% -- but keeping it as low as you can is best.
3. Never make a late payment
Did you know a late payment could result in a credit score drop of around 60 to 110 points, depending what your score was before the credit misstep? Typically, you're reported as paying a credit card late once you're at least 30 days past due. The late payment can remain on your report for seven years.