Tips for Managing Credit Cards When You Have Bad Credit

Credit cards are a convenient way to make purchases and build credit. Swipe your card to get your item, and you don’t have to worry about the bill till later. While credit cards are an easy payment method, you have to use them responsibly. Using credit responsibly will keep you out of debt and help you achieve an excellent score.

Let’s review how to manage credit cards to increase your rating and avoid debt.

How your credit score is determined

Credit cards and credit scores go hand in hand. Credit scores are calculated by evaluating the data on your credit reports. A lot of the data comes from how you use your credit cards.

FICO (used by 90% of lenders) considers the following factors when calculating scores:

• Payment history – 35%
• Credit utilization – 30%
• Length of credit history – 15%
• New inquiries – 10%
• Credit mix – 10%

You’ll find that many rules on how to use credit responsibly correlate directly to how your credit score is calculated.

Top tips for using credit responsibly

Spend within your means

The golden rule of credit card use is to buy things on credit that you can afford to pay for in cash. Do not use your card to buy things you can’t afford to pay off by the due date. Otherwise, you’ll be charged interest on your outstanding balance and can easily fall into debt.

Treat your credit card like a debit card. Only charge what you already have in your bank account. You’ll keep your credit utilization low and be able to pay your bill on time and in full every month. Prioritizing on-time payments and low utilization is the best thing you can do to improve your credit score.

Pay on time, every time

Making on-time payments is essential to achieving good credit. It shows lenders that you’re a reliable and responsible borrower. Even one late payment can damage your score.

Most credit card issuers let you set up automatic payments or will send you reminders. If you miss a due date, pay as soon as possible. Many issuers don’t report late payments until you’re

over 30 days past due. While you will probably have to pay a late fee, you can protect your credit score.

Many people struggling to pay their bills ask, Can you pay a credit card with a credit card? The short answer is no, but there are workarounds – a balance transfer card or credit card cash advance can do the trick.

Keep your utilization low

Your credit utilization rate is the percentage of your available credit that you’re using. The general rule of thumb is to keep your utilization under 30% of your limit. When building credit, use no more than 10% of your total credit limit.

For example, if your limit is $1,000, keep your balance under $100, no more than $300. A low utilization rate shows lenders that you aren’t overly reliant on borrowed money.

Pay more than the minimum

Paying only the minimum on your credit card bill keeps you in debt longer and increases the amount of interest you owe. Aim to pay your balance in full each month. Paying in full will help you maintain a low utilization rate and save you money on interest.

If you can’t afford the full balance, pay as much as possible. Even a small extra payment can reduce your balance faster.

Avoid maxing out your credit card

Maxing out your card signals to lenders that you’re overly reliant on credit. Relying too much on borrowing makes them fear that you won’t be able to afford your bill.

Keep your balances low and avoid the temptation to spend simply because you have available credit.

Pay your bill twice a month

One trick to help maintain a low usage rate is to pay down your balance throughout the month. Credit card issuers only report your activity at the end of the billing cycle. If you have a higher balance mid-billing cycle, you can pay it down before they report it.

Set aside a portion of each paycheck to pay your credit card bill. Since you’re making two payments per month instead of one, you can hopefully pay off your balance in full.

Review your monthly statements

Read your credit card statements each month. Reviewing your statement helps you identify areas where you’re overspending and figure out how to adjust. It can also help you catch fraud early on.

Read your credit card terms

Take the time to read the fine print so you know what fees to expect and how your card works. Note the interest rates, fees, grace periods, due dates, and penalty charges. Knowing when your bill is due, when you’re charged interest, and all potential fees can help you avoid costly surprises like late fees or sudden interest hikes.

Act immediately if your card is lost or stolen

If you lose your credit card, contact your card issuer right away to report the issue. They can freeze or cancel the card and issue a replacement. Prompt reporting limits your liability for unauthorized charges and helps prevent identity theft. Many credit cards offer zero-liability protection if you report the loss promptly.

Avoid credit card debt

One of the biggest mistakes people make with credit cards is getting into debt. Credit card debt is particularly costly because of the high APRs and compounding interest.

Do not fall for the minimum payment trap. Only having to pay 2% of your bill sounds nice, but it will cost you. You will have to pay interest on the remaining balance. The average interest rate, according to the Federal Reserve Bank of St. Louis, is 21.37% APR. Paying interest on a high APR is expensive. Most of the minimum payment goes toward the interest, which keeps growing, and barely makes a dent in the principal. Continue only to make minimum payments; it will take you years to get out of debt.

The best way to stay out of debt is to spend within your means. When you follow that rule, you can pay your balance in full each month. If you don’t carry a balance, you’ll never pay a dime in interest.

Final thoughts

Credit cards are a valuable financial tool for building credit and earning rewards. The right card can give you cash back or travel points toward your next vacation, and it will build your score.

To benefit, you have to use credit responsibly. Spend within your means, only make small transactions, and set up auto-pay. Over time, the on-time payments and a low usage rate will do wonders for your score.