Credit cards are a great tool. They can help you build credit and get paid for purchases you’d have made anyway. Alternatively, credit cards can be a path to financial ruin, leaving you deeply in debt and unable to accomplish financial goals. It all comes down to whether you make credit work for you — or you become the credit card industry’s dream customer.
The good news is, mastering credit doesn’t have to be hard. Just follow these five steps to make money off credit cards instead of having credit card companies make money off you.
1. Don’t let your rewards go to waste
Rewards cards are far more popular than cards that don’t offer perks, but 31% of credit card users don’t claim their rewards. This is a huge mistake akin to throwing out free money. To avoid making it, ensure you’re using a card offering rewards that make sense for you.
To find the right credit card, the foremost consideration should be whether you’ll actually use the rewards, because it doesn’t matter how many rewards you earn if they’re never claimed.
You may also wish to look for a card that rewards the types of purchases you routinely make. You can find cards geared toward many different categories of spending, ranging from travel and online shopping to gas station and grocery store purchases.
Just don’t be so wooed by the promise of a generous rewards program that you sign up even though you don’t actually want the rewards being offered.
2. Don’t pay interest
No matter how much you earn in credit card rewards, you’ll still lose money if you’re paying interest.
The average interest rate on a credit card is 15.99% for travel cards and 20.90% for cash back cards as of 2017. Interest, especially at these rates, makes it harder to repay your debt and costs you a fortune.
If you owed $5,000 on a card with 20.90% interest and paid minimum payments of $137.50 monthly, it would take you 279 months to pay off your debt and you’d spend $8,124.64 in interest. That’s a lot of money that could have gone toward retirement or a nice vacation.
If you’re already in debt and paying interest, make a plan to get out of debt ASAP. If you’re committed to repayment and can avoid irresponsible spending in the future, consider transferring the balance of your debt to a balance transfer credit card offering a special introductory 0% rate.
Most balance transfer cards charge you a small fee for the transfer — typically around 3% — but paying to transfer debt to a 0% interest card can still be a financially sound move since the 0% interest is so much lower than what you were paying before.
Whether you opt for a balance transfer or not, make a plan to pay off debt as aggressively as possible.
3. Don’t pay late
Along with paying interest, paying late is also a financial disaster. A late payment can come with a fee up to $27 for a first late payment and $38 for a second within six months. A payment that is 30 or more days late will also be reported to the credit reporting agencies whose data provides the basis for your credit score.
FICO data shows being late by 30 days could cause your credit score to decline as much as 90 to 110 points, if you previously had a score of 780 and no missed payments. If your score was 680 and you’d already been late twice, another late payment could lead to a drop of 60 to 80 points in your credit score.
To avoid paying late, consider using auto-pay so at least the minimum payment is deducted from your bank account automatically. You can also set yourself calendar reminders.
If you’ve already got a late payment on your credit report, ask your creditor for a good will adjustment. Often, if you’ve been a good customer and haven’t made a habit of paying late, your creditor will be willing to take the late payment off your record.
4. Don’t close old credit cards
Old credit cards collecting dust in your wallet may seem useless– but these cards are doing an important job for you by helping your credit score.
Your credit score is calculated based on a number of factors, including payment history and mix of available credit. One of the factors that matters is the average age of your credit. This accounts for around 15% of a FICO score, and older is better because a long history of responsible payments shows lenders they can trust you. If you close old accounts, you’ll lower the average age of credit and your score will take a hit.
Another key factor essential to a good score is to keep your credit utilization rate low. Your credit utilization rate is worth 30% of your FICO score and it refers to the amount of available credit you’ve actually used. Ideally, you’ll use no more than 30% of available credit to get high marks from lenders who don’t like to see maxed-out cards.
If you close old credit cards you aren’t using, you reduce your available credit and hurt your utilization rate. If you had two credit cards each with $5,000 limits and owed a $3,000 balance on one card, you’d be right at the 30% utilization rate. If you closed your old card and now have just $5,000 in available credit, you’d be using 60% of your available credit — a major red flag to lenders.
5. Don’t open too many new credit cards all at once
Opening too many new credit cards at the same time will also damage your credit score. When you apply for credit, an “inquiry” is placed on your credit report. This is true whether you’re approved for credit or not.
Too many inquiries make creditors nervous you may be about to go on a spending spree. Avoid this by limiting the amount of credit cards you open so you aren’t constantly getting new inquiries on your record.
Opening a few new credit cards all at once also lowers your average account age, hurting your score again. And, unfortunately, having all that open credit could potentially prompt you to charge more than you should. Don’t create a temptation for yourself that could lead you into debt by having a lot of credit cards sitting around.
You can master your credit
Credit card issuers made $163 billion in 2016 in fees and interest charges. It’s up to you if you want to fatten the pocketbooks of card issuers or if you want to have more cash to save for retirement and other financial goals.
If you hope to keep more money in your own pocket instead of sending it to creditors, you have the tools to do that. Following these tips will help you keep your credit score as high as possible so you can get favorable interest rates, and you’ll be able to avoid late payments or lost rewards.