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How to Have a Solid Relationship with Your Credit Card

Credit cards and phone cases

Credit cards are an effective financial instrument that can help you realise your ambitions. Whether you plan on buying a home, travelling around the globe, or saving for retirement, this tool comes in handy. However, establishing a solid financial relationship is necessary to reap their benefits. It means using them responsibly, managing them wisely, and maximising their potential. Nevertheless, this isn’t always easy.

Many people struggle with overspending, accumulating debt, and grappling with high-interest rate fees. Besides, according to the Federal Reserve Bank of New York, the total credit card debt at the beginning of 2023 stood at $986 billion. Moreover, according to TransUnion, credit card balances increased by 20%
compared to the previous year (2022). These struggles can make the navigation of this landscape to be a challenge for many.

But fear not. In this post, you’ll learn how to build a solid financial relationship with your credit card. You’ll learn proven strategies and practical tips to empower you to create a harmonious relationship with your credit card. So, let’s dive in.

How to Build a Strong Financial Relationship with Your Credit Card

Assess Your Current Financial Situation

Before choosing the right credit card, assess your current financial situation. It means reviewing your income and expenses, evaluating your debt and credit card balances, and identifying areas for improvement and financial goals. Here’s a deep dive into how to accomplish these:

Reviewing Your Income Expenses

The best way to review your income and expenses is to create a budget that tracks how much you earn and spend each month. For example, you can use a spreadsheet or a paper planner to record your income sources and expense categories. However, one of the best tools you can use is an app. For instance, consider using Mint — one of the best personal finance management tools.

With Mint, you can track and categorise your expenses according to your budget. It allows you to personalise these unlimited categories. Whenever you approach these limits, it’ll let you know. With this budget app, you can see where your money goes, how much you can save or invest, and how to increase your income. You only need to download and sign up to use it on your phone.

Evaluate Your Debit and Credit Card Balances

It would help if you listed your outstanding debts, including loans, mortgages, student loans, and medical bills, to evaluate your debit and credit card balances. Additionally, you should list all your current credit card accounts, including their balances, limits, interest rates, and due dates. Documenting all this will allow you to see three things: how much debt you have, how much interest you pay, and when you’ll be able to repay it.
You can calculate the balance of your debit and credit cards using a simple formula called the “Net Balance Formula.” Here’s how it works:

Net Balance = Total Credits - Total Debits

To calculate your net balance, add all the credits or deposits you made within a specific period (such as a month). These credits include sources of income like your salary, refunds, or any other money added to your account.

In the next step, add all the debits or withdrawals you made from your account during the same period. It includes expenses, payments, and any other outflows from your account.

Once you have these two totals, subtract the total debits from the full credits. The resulting number is your net balance, which indicates whether you have a surplus (positive net balance) or a deficit (negative net balance) in your account.

For example, let’s say you have total credits of $3,000 and total debts of $2,500 within a month. Applying the formula:

Net Balance = $3,000 - $2,500 = $500

If so, your net balance is $500, indicating your account is positive.

With this formula, you can regularly evaluate your debit and credit card balances and make informed spending, budgeting, and saving decisions. You can use it to determine if you are spending within your means, keeping a positive cash flow, or if they need adjustments to align your financial habits with your goals.

Identify Areas Of Improvement and Financial Goals

It’s vital to assess your debt and finances to identify what alterations you need to make or goals you want to accomplish. Once you have a clear picture of your current financial situation and future aspirations, you can choose the right credit card that aligns with your needs and goals. The following questions can help you do that:

Do you need to pay off high-interest debt?

Do you need to save more for emergencies?

Do you want to buy a car or a house?

Do you want to travel or retire early?

Moreover, you can count on the experts on Tradingguide.co.uk for personalised guidance in identifying areas for improvement and setting financial goals. They can help you make informed decisions and take steps toward a stronger financial future through their expertise and experience in suggesting the best trading platforms to help you with debt management, budgeting, savings strategies, and credit improvement.

Choose the Right Credit Card

When many credit card options are available, it isn’t easy to choose the right one. But if you research and compare different credit card offers, you can find the best one. Here are some steps to follow when choosing a credit card:

Determine Your Credit Score

Finding the right credit card begins with knowing your credit score. Your score is a three-digit number ranging from 300 to 850 that tells lenders your credit risk and risk profile on debt repayment.

The ranges of credit scores vary depending on the credit scoring model (FICO versus VantageScore) and the credit bureau (Equifax, Experian, and TransUnion). The rating you receive depends on the credit score you have.
Here’s a list to help you rate where you fall:

Payment History (35%): Your ability to make timely payments on past credit accounts

Amount Owed (30%): The utilization rate is the percentage of credit you’re using compared to your total limit

Length Of Credit History (15%): The time you’ve had credit

New Credit (10%): Your frequency of applying for and opening new accounts

Credit Mix (10%): Credit products available to you, such as finance company accounts, instalment loans, and mortgage loans

The FICO algorithm calculates your credit score based on these factors and their corresponding weights. The higher the credit score, the better the creditworthiness and the lower the risk for the lender.

Understand Interest Rates, Fees, And Rewards Programs

You should pay attention to each credit card offering interest rates, fees, and rewards programs. Interest rates are the cost of borrowing money from the credit card issuer. There can be differences depending on the type of transaction, such as a balance transfer, a purchase, or a cash advance.
Fees are the charges that the credit card issuer may impose for particular services or actions, such as annual, late, or foreign transaction fees. Rewards programs are the incentives that the credit card issuer may offer for using the card, such as cashback, points, miles, or discounts. Understanding this will empower you to manage your finances better.

Establish Healthy Credit Card Habits

Once you have chosen the right credit card for you, you need to establish healthy credit card habits that will help you build a solid financial relationship with your credit card. Some of the healthy credit card habits are:

Paying Your Bills on Time Fully

It’s the most important habit to develop because it shows that you are responsible and trustworthy with your credit. Paying your bills on time and in full will help you avoid late fees, interest charges, and negative marks on your credit report. You will therefore have a higher credit score and qualify for better terms and offers.

Regular Monitoring of Your Credit Card Statements and Transactions

It’s another essential habit to develop because it helps you keep track of your spending, catch any errors or frauds, and manage your budget. You should review your card statements and transactions regularly and report any discrepancies or unauthorized charges to your credit card issuer as soon as possible.

Avoiding Impulsive Purchases and Sticking to a Budget

Spending money that you don’t have or don’t need is easy with credit cards. It can lead to overspending, debt accumulation, and financial stress. Consequently, it would be beneficial to keep your credit card spending within your budget and avoid making impulsive decisions.

Keeping Your Identity and Credit Cards Safe

According to Security.org, credit card fraud is rising. Based on their studies, about two in three people are victims. Therefore, you should monitor your credit card statements and transactions regularly and immediately report suspicious or unauthorized transactions to your provider.

Credit card fraud is when somebody takes your credit card details and makes purchases or transactions without your approval. Identity theft occurs when someone opens new accounts, applies for loans, files taxes, or commits other crimes using your personal information.

Identity theft and credit card fraud severely threaten your financial safety and reputation and can affect your credit card relationship. Guard yourself against this fraud by adhering to these tips.

Recognizing and Reporting Suspicious Activity

Therefore, take the time to review your credit reports at least annually and let the credit bureaus and the authorities know if you encounter any mistakes or indications of identity theft. Through AnnualCreditReport.com, each of the three major credit bureaus (Equifax, Experian, and TransUnion) will send you a free copy of your credit report every 12 months.

You can also use credit card features and services that enhance security. For example, consider the following:

Alerts and notifications that inform you of any unusual or suspicious activity on your account

Fraud protection and zero liability policies that protect you from being held responsible for unauthorized charges

EMV chip technology encrypts your credit card information and makes it harder to counterfeit

Contactless payments that allow you to pay without touching or swiping your card

Virtual card numbers that generate temporary numbers for online transactions

Your credit card can either be your greatest friend or your most prominent foe, based on how you use it. If you want to build a solid financial relationship with your credit card, follow these tips and strategies. If you do, you can take advantage of features like convenience, flexibility, rewards, and security that come with them.

Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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