Credit cards can be very useful. They allow you to spend conveniently, while potentially earning cashback, airline points, and other rewards. 

Yet, if not used properly, credit cards can end up costing you thousands of dollars extra, and damaging your credit score. Follow these tips to make the most of your credit cards, and avoid the risks.

1. Always Pay On Time

Your payment history counts for 35% of your FICO score. Paying on time greatly increases your chances of always having a strong score, while not paying on time pretty much guarantees poor credit. So, no matter what, never pay late.

If you are like a lot of us, your schedule is busy, and it might slip your mind, to pay on time. To avoid this, set up automatic payments (known as “autopay”) through your credit card issuer. Through this, you can either pay off your statement, the minimum amount due, or a specific portion of your balance, every month, without having to think about it. 

You can also centralize all your accounts in one location, for free, through Mint, allowing you to keep track of balances, statement due dates, and more. You can also automate all your bill payments in one location, through EarnUp.

Thanks to these platforms, you never have to worry about paying late again. Still, we recommend logging in to your credit card accounts each month, and making sure that there’s no unusual activity on your accounts.  

2. Keep Your Credit Card Balances Below 30% Of Your Card Limit (or lower) 

Your debts, or amounts owed, count for 30% of your FICO score. Your credit card debts play a larger role in this part of your FICO score, than your installment accounts (such as mortgage, auto, student and personal loans), so you’ll want to keep these balances low. 

Your credit card debts should stay below 30% of your card limits. So, if you have a limit of $1000.00 on a card, make sure that your balance doesn’t pass $300.00, by the time your statement is prepared. Usually, your accounts are reported to credit bureaus soon after your statement date. 

Make sure you apply this rule of thumb to all accounts, since having a low balance on one card, and a higher balance on others, isn’t good for your overall credit score. Keeping low balances is, in general, just a good spending habit. 

If you can, it’s even better to keep your balances (as of the statement date) at no more than 1% to 5% of the limit. These low balances allow you to further maximize your FICO score. You should keep in mind, however, that while lower balances are generally better, a $0 balance is not neccessarily ideal. Showing no balance suggests that you don’t use your credit cards, which is not great for your FICO score.  

3. Avoid Closing Credit Cards 

At some point, you might decide to stop using a particular credit card. Perhaps you don’t feel like it offers the sorts of rewards you are looking for, or maybe, you found a better card. It’s tempting to close the card – but, in most cases, you shouldn’t. 

When you close a credit card, it doesn’t fall off your credit report immediately. Instead, it will say on, for up to 7 years (if you ever had any late payments), or 10 years (if you always paid on time). Now, your average age of accounts (meaning, how long you’ve had each account open for), counts for 15% of your credit score. 

A closed account does count towards your average age of accounts – but only for as long as it remains on your credit reports. After that time period, the account is removed, and your FICO score may drop. 

For this reason, it’s a good idea to keep your credit cards open for as long as possible. Since a card issuer can close an account for inactivity, you might need to use the card at least once every few months (and pay off your balance afterwards).  

If the card has a high annual fee, and you don’t plan on using it, closing the card might make sense. Otherwise, keep it open.

4. Research Your Credit Card Options 

Before you apply for a credit card, you should do some research. First, you’ll want to find out about your chances of being approved. After all, there’s no point in applying for a card and being denied. 

Each time you apply for a credit card, a credit inquiry occurs. Since credit inquiries count for 10% of your FICO score, the more inquiries on your credit reports, the more damage you’ll face to your FICO score. Therefore, you want to research your credit inquiries wisely. 

 Also, you should figure out whether the benefits the card offers, make sense for you. For example, if you are looking for travel rewards, or cashback, you’ll want to select the card you qualify for, which most effectively maximizes those rewards. 

You should take careful note of any annual fees, as well as when promotional offers end. Often, people sign up for a card, forgetting that they’ll be paying high fees, when that period ends. Avoid this, by figuring out potential costs upfront.

Where should your research credit cards? NerdWallet offers great tools to shop and compare credit cards, including predictions regarding your odds of approval. Credit Karma and The Points Guy are also both really useful for comparing credit cards. 

The Final Word     

Ultimately, credit cards can be great for saving money, earning rewards, and building credit. By following the simple steps laid out above, you’ll be able to effectively manage credit cards, in a way that maximizes your credit score, and lets you enjoy the rewards.