5 Credit Card Rules You Should Definitely Be Following | ModMoney

5 Credit Card Rules You Should Definitely Be Following

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You know those people who pull out a different credit card each time they make a purchase? Admittedly, I'm guilty. I have several cards in my wallet that I use interchangeably to maximize reward categories. But it's important to note that I slowly built my way up to this point.

Spending on a credit card is a great way to earn cash back, travel rewards, and other perks. But if you're not diligent, you can do yourself and your credit history a disservice. Conscientious cardholders use their cards to build up their credit score and earn a return on purchases they already make. However, there is a fine line between managing your credit to build you up and mishandling it to bring you down. To help you bridge that gap, here are five rules that responsible credit card pros always follow.

1. Treat your credit cards like cash.

Credit cards are dangerous because they can emotionally distance you from the act of cash leaving your pocket. It's so easy to pull out your credit card at the mall and spend more money than you intended. That's why responsible cardholders always operate as if cash is leaving their account when they swipe. It essentially is, since they pay their full balances each month. This leads into the next rule.

2. Never carry a credit card balance.

If you don't carry a balance, then you never have to pay interest on your credit card debt. And trust me, paying interest completely negates the value of any points you earn from spending. Interest rates on your credit card may range from 15-25%. That's very high!

To avoid paying interest, set all of your cards to auto-pay the full balance every month. Your credit card company will give you the option to pay the minimum balance or the full balance. This can be confusing. If you only pay the minimum, you will pay interest on the outstanding balance above that. So always pay the full!

3. Track your spending.

When you get a shiny new card that offers 3x points on dining and travel, it's tempting to splurge. You may make an excuse to schedule a few date nights at that downtown steakhouse and then book a vacation. Careful cardholders don't justify spending extra just because they earn points back. In fact, they carefully track their spending to make sure they don't stray from their budget.

I have multiple credit cards with different issuers, so it can be difficult to track activity on each. My favorite tool to help me track my spending is Personal Capital. This is a free app that aggregates all of my accounts on one dashboard. Personal Capital helps me set a budget and tracks my spending by category. It also has other functionalities beyond the scope of this post. These include tracking net worth, advising on investment accounts, pointing out hidden fees, and helping plan for retirement. I check my Personal Capital dashboard every day because it simplifies my finances and gives me a full picture of where I stand.

Best Finance App: Personal Capital

4. Know your credit score.

Your credit score is an important number to know. And it doesn't just influence which credit cards you will be approved for. It also determines interest rates on a mortgage or car loan, insurance premiums, and even shows up on employee background checks. Using a credit card responsibly is one way to improve your score, which is made up of 5 factors I discussed here.

So how do you find your credit score? Several credit card issuers offer cardholders free access to their scores. Additionally, software platforms like Credit Sesame offer free monthly score updates. You can also review your credit report for free once a year with each consumer credit bureau (Experian, TransUnion, and Equifax). Diligent credit card users check all three reports annually at www.AnnualCreditReport.com and ensure against any errors.

5. Don't apply for every card.

I receive credit card promotions in the mail on a weekly basis. "Sign up for this card and receive a 50,000 point bonus!" "Apply now and get your first year's fee waived!" I'm sure some of you have similar experiences. But just because you are pre-qualified for a card does not mean you should open it.

Each time you apply for a new card, the inquiry slightly dings your credit score. Plus, each new credit card makes it increasingly difficult to manage your portfolio. Responsible cardholders never sign up for every offer. They are realistic about their purchases and travel loyalties and only sign up for new cards if they add value.

For example, I receive Delta card offers on a regular basis. But it doesn't make sense for me to apply because 1) I don't fly Delta very often, 2) I have another card that transfers miles to Delta, and 3) The card charges an annual fee that outweighs the benefits.

The Bottom Line

Spending money on a credit card can either be beneficial or incredibly harmful to your finances. If you carry credit card debt, overspend, or disregard your credit score, it's time to rethink your approach. Using your credit cards prudently, on the other hand, can earn you lucrative bonuses, cash back, and travel rewards. Heed these five rules, and you'll be on your way to experiencing all of the perks that credit cards offer.

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