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The Best Ways to Manage Your Credit Cards

by David Sung

No matter what big chain store you shop at, it seems like all of them are willing to give you a credit card. Yet, no one is as quick to give you credit card counseling once you've signed the dotted line. But, don't worry – we're here to let you in on a few secrets. However, before we can crawl through the crevices and corners of credit card management, let's get some basic background information out of the way.

Crash Course in Credit Cards

Credit cards are basically mini-loans. The cardholder agrees that every time she or he swipes the card, the lender (issuer of the card) will pay the merchant for them, and then the cardholder agrees to pay the money back. In addition, the lender charges the cardholder a monthly fee for lending you that money, called a "finance charge" based on how long the cardholder keeps the loan. This charge is determined by the card's Annual Percentage Rate (APR).

Choose a Good Card

With so many credit cards (and their accompanying literature that can rival an encyclopedia in size) choosing a card with a good rate is as important as shopping for a car. So, be cautious when signing up for cards. To give you a basis, here's MSN Money's break down of APRs:
  • Great: Around 10%
  • Average: Around 15%
  • Bad: Above 22.99%
If you're going to sign up for a card, it's also not a bad idea to look for cards that have reward programs.

Don't Carry a Concealed Weapon

Credit cards can be dangerous! Mainly because of a little thing stores love to capitalize on called "impulse spending." A general rule of thumb is: Carry no more than two credit cards at a time to minimize spending.

Spend Smart

Before swiping your card, make sure that you can pay off whatever balance is accrued within that month. If your next paycheck can't pay it back, leave it on the rack.

Keep the Big Picture in Mind

Credit cards are just a part of the debt equation. Remember, in addition to that monthly credit card bill, you probably have a car payment, rent, and groceries. The Motley Fool recommends keeping your debt-to-income ratio below 25%. Here's how you calculate that:
                Total Monthly Debt ÷ Monthly Income after taxes = Debt-to-income Ratio

Save the Date

Always pay −at the very least− the minimum monthly payment. Missing this payment can reflect on your credit reports and affect other financial areas of your life.

The Minimum is Never Enough

While paying the minimum payment will keep you in the clear with the card's issuer, it can take up to decades to pay back some balances if you just pay the minimum payment. Recognize that if you only pay the minimum payment, the remaining balance still accrues interest based on the APR. In the long run, that can add up to hundreds (or even thousands) of dollars. To see how long it will take you to pay off a balance with only minimum payments, check out CNNMoney's Debt Calculator.

Pay by Priority

If you can't pay all of your balances off within a month, pay all your minimum payments first. Then, allocate whatever money you have left over to pay off the cards with the highest interest rates first. That way you accrue the smallest amount of interest possible.

Credit cards may be a necessary evil −but they don't have to be evil. Just follow these steps and educate yourself about your credit cards. For more information on managing your credit, read this blog post about five little known credit card facts.

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