If your employment and income have been impacted as a result of the Covid-19 pandemic, then you may find yourself charging more to your credit cards than usual.
It’s natural that you would want to save and keep as much cash as possible if you’re uncertain about future money coming in.
Or, perhaps you’ve always been happy to put every dollar you spend on a credit card because you can earn rewards for travel, get cash back, and receive other loyalty bonuses.
Regardless of the reason, consider these six things to make sure you’re using your cards in the smartest ways possible. Not doing so might hurt your credit score or history, or cost you more money in the long run.
Your credit utilization ratio is one of the factors that impact your credit score. This ratio expresses how much of your total available revolving credit you’re using at any given time.
You can find it by dividing your credit card balance by your credit card limit:
For example, if you have a credit card balance of $5,000 and a total available credit line of $12,500, then your credit utilization percentage is 40%:
Paying off your balances in full every month is the best way to ensure your everyday credit usage doesn’t negatively impact your credit score.
If that’s not an option right now, then try keeping your balances at less than 30% of your total available credit limit.
Low balances show lenders you’re a responsible borrower, which will help keep your credit score in good standing.
In addition to keeping your utilization low, you’ll want to keep a close eye on general spending.
Seamless point-of-sale transactions that encourage mobile wallet payments may help you avoid the hassle of taking out your cash or credit card, but you could also lose track of how much or how often you’re spending.
While technology makes it easier than ever to pay for goods, try to avoid the temptation to spend more just because it’s convenient. The more you charge unnecessary items, the more you also impact your credit utilization.
To help you better manage your spending, consider creating a budget based on a method that works best for you. Start by determining your necessary monthly expenses versus your discretionary spending or simply put, what you need versus what you want.
Or use technology to your advantage with a money management app. One with features such as budget goal tracking, breakdowns by spending category, and alerts for when you’re coming close to budget limits can help you more easily stay on track.
If you’re putting everything on your cards, then it could be in your best interest to take advantage of the ones with the best reward offers and try to align them with your spending.
Some cards provide bonus points for specific spending categories. For example, if you have a card that offers the highest points on grocery spending, then use that card for groceries. If another card offers the best rewards for gas, then use that one for gas.
Finding a card that’s a good match for your spending habits will help you earn the most rewards and may help you save money or earn better rewards in the long run.
Depending on your rewards program, you may even be able to use your points for a statement credit toward your bill.
The annual percentage rate (APR) is the amount credit card issuers charge you for borrowing money from month to month.
If you plan on paying your balance in full each month, then the card’s APR matters less because you won’t incur any interest charges.
However, if you know you won’t be able to pay your bill in full, then using the card with the lowest APR will cut down on the amount of interest that accrues while you maintain a balance.
If you’re having trouble deciding between using a rewards card versus a card with a lower APR, then consider whether the rewards you’ll accrue from the former are worth the interest charges you’ll pay if you hold a balance.
Keep in mind that rewards points are not always redeemable dollar for dollar. In many cases, rewards are worth a rate of only one cent per dollar spent, which means that 10,000 rewards points may only be worth $100. Consider whether $100 of rewards is worth the amount of finance charges that will continue to accrue month after month if you carry an outstanding balance, otherwise use a card with a lower APR.
Some reward cards may offer even less value, depending on how the rewards are collected. For example, those 10,000 points may be worth $100 if spent on gift cards or merchandise, but only $70 if redeemed as statement credit or cash-back.
Some merchants, particularly service providers like utility companies and landlords, may charge a processing fee if you choose to pay your bill by credit card.
Here, it’s important to do your research. Figure out how much you’re spending on these fees and, if they are costly, then opt for a different, fee-free payment method such as payments by mail, direct deposit or an automatic payment linked to a bank account.
If you’re going through a financial hardship and you suspect that you’ll be putting more on your credit card than usual, you may want to consider alternatives – such as dipping into your emergency fund, seeing if the CARES Act could help you, or asking your issuer for a credit line increase.
If you opt for the latter, raising your total amount of available revolving credit can lower your credit utilization ratio and give you more room to spend before you hit that crucial 30% mark.
Some companies may also offer payment assistance or rate freeze programs. But be sure to get the program enrollment details first because you may not be allowed to make any new purchases after you sign up.
If you’re putting everything on your credit cards right now, then the six tips above can help you use your cards to your advantage, and ensure that both your credit score and finances stay in as great shape as possible.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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