Credit cards are convenient and, if used wisely, can help you build a high credit score. Here are some tips on how to take advantage of the benefits of credit cards while avoiding the downsides of credit mismanagement.
Watch the interest rate
Although it's obvious that the lower the interest rate, the better, it can be surprising how much of a difference the rate can make.
- If you have a balance of $8,000 at 16% APR, the interest charges are $1,280 a year.
- If you transfer that balance to a card that charges 4.9%, your annual interest costs will be $392.
That's nearly $900 less—an excellent argument for shopping around for the best APR.
Consider the grace period
Most credit cards come with a grace period (the time between when you purchase something and when your bill arrives) when no interest accrues. The longer the grace period, the better.
Note: The grace period usually applies only when you've been paying your balances in full each month.
Think carefully about special introductory rates
Before taking advantage of what seems like a rare offer of low-cost or even free financing, take a closer look:
- How long does the introductory rate last? Some cards offer an interval of six months or longer, but others are only good for two or three months.
- What happens after the introductory period expires? Where does the rate settle? Some rates increase substantially; this means your introductory rate of 3.9% can quickly become 18%.
- Is there a transfer fee? Read the fine print to see whether the card issuer charges a fee to transfer balances — a charge that effectively increases your true rate.
- What happens if you're late with a payment (or two)? If you're late with a payment or two, you’ll be charged a late fee and your credit card interest rate may increase—possibly to 20% or more.
Penalty fees can be $25 or more for each late payment. If you’re late with four payments in a year, you’ll throw away $100. Just as important, making late payments will damage your credit rating, and that can cost you significantly the next time you need to borrow.
See how you are protected
The Fair Credit Billing Act protects your rights when certain disputes occur related to billing errors. For example:
- Unauthorized charges (federal law limits your responsibility to $50).
- Charges that list the wrong date or amount.
- Charges for goods and services that you didn't accept or weren't delivered as agreed upon.
- Failure to post payments and other credits.
Learn more about your rights under the Fair Credit Billing Act (PDF, 97KB).
Look for rewards
Many credit cards offer rewards programs that give you cash back or “points” that you can use to purchase merchandise or services like air travel or hotel stays. Shop around to find the card that offers the best rewards program for your lifestyle.