Your 5-minute guide to credit cards

Credit cards do have some benefits, but it's easy to get into financial trouble if you rely on them too much. Here are more than a dozen tips for using cards wisely.

Use a credit card wisely and you can reap benefits like cash back, bonus points and airline miles, not to mention a better credit score. Use it unwisely and you could end up under a mountain of debt.


The No. 1 rule is: Pay off your balance every month. Otherwise, you'll pay interest on your purchases. Paying the balance takes discipline. About 40% of households carry credit card debt, according to the Federal Reserve.

Make your payments by the date -- and time -- they're due. Late fees are $29 or more. A couple of late payments will trigger an interest rate increase. Because late and missed payments lower your credit score, the interest rate can go up on your other credit cards and for future loans as well.

Limit the number of cards you have. Experts recommend having two to six cards. Applying for lots of cards can hurt your credit score. Conversely, closing several credit cards at once will trigger a decrease in your score.

Read the fine print. Know the interest rate you will be charged, the grace period for paying your debt before interest kicks in and your credit limit. Does your company use two-cycle billing? (Better look, because two-cycle billing means you could pay interest even when you carry no balance.) Also, almost half come with a "universal default" clause, allowing an increase in your interest rate if you are late paying any other bill.

Negotiate. If your credit score is 700 or above, you may be able to get a lower interest rate or get the company to drop a late fee. (Estimate your credit score.)

Don't exceed 30% of your credit limit on each card. Credit bureaus don't care if you pay off your balance each month. They're interested in how much of your available credit you use. If it's excessive, your credit score will drop.

If you're transferring a balance to a new card with lower interest, find out how much the company will charge for the transfer. Urge that it be done electronically so you don't accumulate interest on both the old and new accounts. Low-interest introductory offers may apply only to the balance transfer and not to new purchases.

Reward cards that provide dividends like rebates and airlines miles sound too good to be true, and can be. The higher interest rate charged by most reward cards can more than offset the reward if you carry a balance. Reward offers can change with little notice and may come with budget-busting conditions -- for instance, you have to spend a certain amount to earn the reward.

If you buy a defective item or protest a charge, your credit card company is obligated to investigate. If your card is stolen, you're liable for no more than $50 for unauthorized charges.

Other "services" offered by credit card companies have potential drawbacks.

Contactless credit cards make it even easier to purchase items because you don't need to swipe your card or hand it to a cashier. But thieves can scan the info on your card. You can buy a signal-blocking sleeve or make one out of aluminum foil.

Don't use "convenience" checks your credit card company sends you unsolicited in the mail. They're costly -- with a fee of 3% or 4% of the amount you write, plus high interest rates with no grace period -- and don't provide the consumer protection you get when you make a purchase with your credit card. (See "Dangerous checks in the mail.")

Credit card protection insurance generally covers only the minimum payment if you become disabled or unemployed, and interest continues to build on your outstanding balance.

Using a credit card issued by a department store you frequent can entitle you to cardholder discounts, but limit yourself to one card. Each department store account you open reduces your credit score.

Getting and using a credit card could be the easiest way to re-establish credit if yours has gone sour. But getting back into the credit game comes with potential hazards.

Cards issued to those considered credit risks come with interest rates in the 18% to 22% range and low spending limits. Such cards sometimes have extra fees hidden in the fine print.

Don't take the bait when companies want to issue you one low-limit card after another. You can find yourself back in debt, paying late fees, over-limit fees and high interest rates on multiple cards.

By MSN Money staff

Dave Ramsey’s Steps to Financial Freedom

1. Save $1,000 to start an Emergency Fund
2. Pay off Debt using Debt Snow Ball (See Debt Snowball for further details)
3. Fully Fund Emergency Fund with 3-6 months of expenses
4. Invest 15% of household income in Roth IRA’s and Pre-Tax Retirement Plans (.e. 401K, 403B, etc.)
5. Start a college fund for children
6. Pay off home early
7. Invest in Mutual Funds and Real Estate – Build Wealth and Give!

Let's Start the Saving Process: Step #1

The first step to becoming a "saver" and creating a realistic budget is:

Step # 1: Identify where the money goes.

To accomplish step #1: I recommend using the envelope system and retaining receipts for ALL of your expenses for 2 weeks. The envelope system is an old-fashion simplistic method of budgeting that consists of creating spending categories (i.e. groceries, entertainment, household, etc.) and storing the cash allocated for each category in an empty envelope. The idea is to NOT use your debit/credit cards for any purchases.

Before credit and debit cards were so popular people would withdrawal their paychecks to cover monthly expenses. It has been shown in various studies that we are more prone to spend more when we purchase items with our debit/credit cards due to the physiological disconnect of not "seeing" the money transfer hands. In other words: We do not realize how much money we are actually spending because the "swipe" of a credit card doesn't "sting" as much as passing the cashier a $50 dollar bill for a few gallons of gas.

Therefore, taking it back-to-basics will help you snap back into reality and become more conscious of your daily spending.

Thus, for 2 weeks I want you to do the following: create a budget that consists of the major spending categories (i.e. gas, groceries, entertainment, personal items, etc.) - withdrawal enough cash to fill all of your envelopes and as you spend in each category, account for every penny with a receipt.

Keep in mind - some expenses can not be paid with the envelope system such as rent and other payments that are automatically deducted from your account.

It should also be noted that after an accurate estimate of your monthly spending has been established, if you decide to employ the envelope system as your permanent budgeting mechanism transferring money between envelopes is not allowed, the transference of funds deteriorates the benefits of staying within your allowed amounts. See other posts about the Envelope System for more details.

Creating a Budget you can live with: Step #2

Money is a tool that enables you to reach your goals in life, but until you know where your money goes, you can’t make conscious decisions about how to use this tool effectively. A budget shows you exactly where your money goes and provides a spending plan that lets you save for the things that are important to you: a new house, a new car, a comfortable retirement, a college education, travel, or whatever your particular goals and dreams happen to be.

The first steps to creating a budget are:
1. Determining your net monthly (take-home) pay and monthly fixed expenses (i.e. Housing, Car Payments, Insurance, etc.)
2. Determine your monthly variable and discretionary expenses (i.e. Food, Transportation, Utilities, Personal, etc.)

How do I determine my monthly net income and expenses?
1. Review your monthly bank statements to calculate net monthly income and total fixed expenses
2. Review variable expenses such as utilities, cellular phone bills, transportation, etc. can be determined by averaging 3 months of statements.
3. Discretionary/Personal Expenses can be estimated by closely tracking every penny for a week or two. Using the Envelope system and retaining receipts can help with tracking impulse spending.