Having a credit card can be beneficial. For example, it can improve individuals’ credit scores, improve their cash flow and provide increased protection versus cash should there be a problem with the goods or services that have been purchased.
At the same time, though, credit cards can cause challenges for some consumers. Interest charges can be high, while fees can also add up. It may also be challenging to identify which card is most suitable for an individual’s personal circumstances.
With that in mind, here are three credit card habits that I think everyone should follow. By following these habits, I think most people will find they get they’ll get the benefits of swiping, while avoiding the downsides.
1. Pay the balance in full
While the idea of paying off a credit card in full each month may sound obvious, many consumers end up paying interest on existing balances. This is understandable, given the slow pace of wage growth in recent years, but means that credit cards are unlikely to be an efficient means of borrowing for the long term. The interest rates on credit cards can vary significantly, but are usually much higher than for other forms of credit such as personal loans.
One way of ensuring that a credit card is paid off each month is to set up a direct debit for soon after payday. That way, the chances of ending up paying a high rate of interest on credit card debt are reduced.
2. Find the right card
There are a wide range of credit cards available. The cards fall into a number of different categories, such as rewards, balance transfer and others. All cards have advantages and disadvantages, which can make it challenging to decide which is the best opportunity.
However, the key aspect when obtaining a credit card is to find the one that best fits an individual’s personal circumstances. For example, for people who are looking to reduce the interest they pay on existing debt, a balance transfer card may be most suitable. For someone who travels internationally on a frequent basis, a travel card may be the best fit. Likewise, a reward card could be a good idea for people who pay off their balance each month and want to maximise the returns on their spending.
By finding the right card for their personal circumstances, consumers may be able to improve their financial situation to the greatest possible extent.
3. Avoid fees
Credit cards come with a range of fees. Some of the most common fees are an annual fee and a non-sterling transaction fee. The latter is charged on spending internationally and can be around 3% of the amount spent. As such, for individuals who plan to travel abroad, it may be worth taking out a card that offers a 0% fee on non-sterling spending.
Annual fees are generally best avoided – unless they provide a benefit that has a positive net impact after the annual fee has been deducted. Otherwise, it may be best to shop around for a card that does not charge people for the privilege of simply having it.
My takeaway
Getting into ‘good’ habits when it comes to credit cards can be worthwhile. By avoiding interest payments, finding the right card for given personal circumstances and avoiding unnecessary fees, it may be possible to maximise the benefits of a credit card in the long run.
