FOOL SCHOOL
Get The Most From Your Credit Card

August 15, 2003

Make no mistake, credit cards can be dangerous if you don't know how to use them properly. Here in the UK, consumer debt has grown rapidly, doubling in the last four years alone. Many of us find it all too easy to build up credit card debt we can't afford.

The interest rates charged on credit cards are relatively expensive compared to other forms of debt, such as a mortgage. This means that they aren't the most cost-effective method of carrying debt on an ongoing basis. If you are one of those people who permanently carries a heavy balance, then a visit to our Get Out of Debt centre is probably in order.

Pay Them Off Each Month

The best way to use a credit card is as a cash flow tool. By this we mean pay off the balance in full each and every month but take advantage of the interest-free period offered. Of course not everyone can always manage to do this and because you don't have to pay the credit card bill, unlike your mortgage or utility bills, it's tempting to miss the odd month.

But remember credit card debt is expensive (did we mention that before?). It's far better to forgo the odd luxury every now and again than to take the easy 'minimum payment' option. Credit card debt does not go away. Left untouched it's get bigger and nastier each month so think of it like weeding the garden. Nip the problem in the bud before it gets out of control.

Review Your Statements

It's a chore we know but you should check your statement every month to make sure you aren't being charged for something you shouldn't be. Mistakes do happen occasionally, even with the best computer systems. If you do find a mistake contact your credit card company immediately and they should be able to rectify it.

Also make sure you keep one eye on what rate of interest your card is charging. Although the rate may have been competitive when you first got it there are no guarantees that it will remain so. Often attractive rates are offered on newly launched cards in order to attract business but are then slowly raised over time relying on the fact that many of us can't be bothered to switch.

Credit Limit Does Not Mean Free Money

One of the most common mistakes made with credit cards is thinking that the credit limit represents free money. IT DOES NOT! There are many examples of people who have sensibly collected all their debts in one cheap, manageable loan and then promptly gone and 'maxxed out' their plastic a few weeks later thinking they are free to spend again. This is cardinal sin number one as far as credit card debt is concerned.

If you spend a lot on your credit cards you will often find that your provider will raise your credit limit, often on a fairly regular basis. Many people seem to treat an increased credit limit as a personal spending challenge. Don't make the same mistake.

Multiple Credit Cards

You might be forgiven for thinking that credit cards breed inside your wallet or purse when you aren't looking. Not only that but a large proportion of junk mail seems to consist of offers of yet more plastic. But the fewer cards you have the better. A fistful of different credit cards, sprinkled with the odd devilish store card, is usually a clear sign that your money management skills are sorely lacking.

More cards mean that it is harder to keep track of how much you have spent and, more importantly, how much you owe. It also makes it easier to forget or decide not to pay one or more off each month. It is far better to have one credit card, offering a competitive rate.

Credit Scoring

Whilst it's tempting to hop from one cheap credit card to another, such a tactic could have a hidden side effect. When you make an application for credit a note to this effect appears on your credit record even if you later decide to cancel your application. Too many applications and the credit card company who's checking you out might think you're a high risk customer. This article has more details on how credit scoring works.

Learn From Other Fools

Our credit card discussion board is an excellent place to keep track of the latest developments and learn from the experience of others. You can find it here.

Find out more and take advantage of 0% deals on balance transfers in our credit card centre.