Janet Bodnar (Deputy Editor, Kiplinger’s Personal Finance) gives expert video advice on: Should I take advantage of low rate offers and transfer my balances?; How many credit cards should I have? and more...
How much should I pay each month on my credit card accounts?
Ideally you should pay your credit card accounts in full every month. Your credit card really should be a convenience for you. Nowadays, not only is it a convenience, because you don't have to carry cash with you, you can also build up frequent flier miles, cashback points or that sort of thing. So using your credit card can really be a good thing for you over the course of a month. But you don't want to get in over your head. You don't want to ever spend any more than you can pay off at the end of the month. So your ideal should always be to never exceed that amount, to be able to pay in full every month. You're never going to owe any interest, and you're going to get all those rewards in return.
Why should I pay more than the minimum payment on my credit card accounts?
First of all, if you carry a balance on your credit card accounts, paying more than the minimum payment means you're going to pay it off more quickly. It means that you're going to pay less interest. It means that you're going to have more available credit for future purposes, and also it means you're going to get out of the hole. If you only make minimum payments on your credit card, there's a very good chance that you're never going to get out of debt, because you're never going to be keeping up with the interest payments. So, the interest is going to be accruing faster than you can pay it off, and that is something you never want to happen. That's why you should always make more than the minimum payment.
What if I have to carry a balance on my credit card?
It's OK to carry a balance from month to month, but make sure, first of all, you've got a low interest card so that you're not paying any more interest than you have to. Make sure that you're making more than the minimum payments, so the interest is not building up and building up over time. Make those payments on time because again, as long as you're current with your credit card payments, it's going to be a good mark on your credit record.
Should I take advantage of low rate offers and transfer my balances?
You can take advantage of low rate offers but you just have to be careful how you do it. For example you may get an offer of a zero interest rate on your transferred balance. But, after six months that rate is going to go up to 13% or 14%, so, you need to know how much that rate is going to increase and after what period of time it is going to increase. Is that zero percent interest rate going to apply to any new charges on the account? If it doesn't, don't charge anything new on that account, just use the transferred balance. Is there going to be a fee for transferring the balance? If so, how big is that fee going to be? It may make sense to transfer a balance if it's larger, but if it's a small balance the fee may be too large in relation to the balance that you are transferring. The key is just to know the details of the balance transfer and make it work to your advantage, and to pay off the debt before the interest rate goes up.
How do my credit cards impact my credit score?
Certainly the payment history on your credit cards is going to have a big impact on your credit score because that's really one of the most common forms of debt that people have. So, it's really important to make those payments on time and keep those balances low, as well as not opening too many credit cards at any given time. Basically, keep that credit card debt under control, because it will have a big impact on your credit score.
Is it better to have a credit card with a fixed rate or variable rate?
I think it's better to have a credit card with a fixed rate. Now, a fixed rate of interest means that you're always going to be charged the same rate of interest on your credit card. It might be 12%, 13%, 14%, but you always know what you're going to be charged. With a variable rate of interest, that rate might start off being lower, but it could go higher because it's tied to a specific benchmark. If that benchmark goes up, then the variable interest rate goes up as well. It's not necessarily a bad thing, but it doesn't make people feel as secure as a fixed rate does. So if you can get a reasonable fixed rate, I would go with that rather than a variable rate.
What if I pay my credit card bill late?
If you pay your credit card bill late, and bad things can happen. Number one is that your credit score can drop. Number two is that you're probably going to be hit with a late payment fee, which could be as high as $39. And number three, your interest rate could be jacked up, possibly to over 30%, so it's really a no-no to pay your bill late. But if you do pay your bill late, and it's an accident, then don't make a habit of it. If you forgot to make the payment, you left it in your briefcase, for example, I would immediately call the credit card issuer. Throw yourself on the mercy of the issuer and say, "Look, you know that I don't do this regularly. I would really prefer not to have to pay the fee or have my rate increased." If you have a good history, it's very likely that the credit card issuer will go along with you and make accommodations.
How many credit cards should I have?
As few credit cards as possible is the optimum number. You might want to go with two cards, one of which you use as a convenience - about your frequent flyer card for example - or about cash back card. But, you pay it off every month. Then, another card is maybe the card that has the low interest rate, and that would be for balances that you might want to carry over from month to month. Suppose you have to buy a new computer, or a new refriderator - a major purchase that you're not going to be able to pay off when the next months bill comes. Then you want to have a low interest rate card and a plan for paying it off. So, two credit cards is a good number, but generally the fewer credit cards the better.