Want to Become Credit Card Savvy? Just Follow Five Simple Steps

Credit cards are a necessity in today's world. The good thing about credit cards is that they let you make purchases, when cash isn't an option. The not-so-good thing: They tempt you to impulsively charge items you don't really need. Keep in mind that every time you use credit cards, you're borrowing money. So think of credit-card debt as a high-interest loan, and consider these five smart ways to use credit cards.Shop Around
Shop around. With hundreds of credit cards to choose from, it's smart to shop for the best deal--a card with no annual fee and a low APR (annual percentage rate)--advises a financial consultant of a credit repair company in New York, often dramatically, particularly if you make one late payment.

If you plan to pay your bill for credit cards in full each month, look for a low annual fee and a long grace period--the time between the statement date and the payment-due date in which you'll avoid finance charges. If you plan to carry a balance, go for the lowest interest rate. Also look for a low rate on cash advances.

There are a lot of credit cards that offer great rewards and benefits. Usually there are some annual fees attached to credit cards that have great rewards. However, these rewards may outweigh the annual fee significantly so you will still save even though there is an annual fee attached to that credit card. Some credit cards offer great rewards and no annual fees. I have picked several great credit cards with no annual fees that offer excellent rewards and high credit limits. You should pick a card with reward that you think will be most appropriate for you, so you can save. If you pay your balance in full each month then the APR interest rates will not apply to you, so you should ignore it. The most beneficial credit card will be the one that has rewards and no annual fees. Also, look for a credit limit when applying for a no annual fee credit card. Annual fees are usually low; they range from $20 to $100, so a credit card that has great rewards and has an annual fee may be more valuable to you then a credit card with no rewards at all and no annual fee.

Improve Your Credit Record
A credit report is a snapshot of your debt-paying activity; your credit (FICO) score--a number from 350 to 850--predicts whether you're a good credit risk (above 620 is considered respectable). The higher your score, the better your chances of getting a low interest rate on credit cards, car loan or mortgage. Charging near the limit or maxing out credit cards can lower your score, Martin says. Get a copy of your credit report at least yearly from the three major credit bureaus (Equifax, Experian, Transunion). You should challenge if there is any error. Under a new law, by September 2005 all consumers will be able to get a free credit report.

Restrict The Number Of Cards
A wallet filled with credit cards (which represent money you owe or can borrow) may work against you, when you apply for a loan or mortgage. Two or three credit cards are enough, Martin says. If your credit report indicates you already owe or can access a great deal of money, potential creditors may determine that added debt could strain your ability to repay.

Switch Balances Cautiously
If you transfer your high-interest balances to a low-interest credit card, be aware that the low rate may last for only a limited time, and that many credit card companies assess transaction fees, sometimes up to 4% of the amount transferred. Avoid credit cards that charge hefty fees, which may outweigh any savings offered by a lower interest rate. Scrutinize the application or call a company representative and ask about all charges before signing up. Once you transfer the debt, stop using the old card.

Avoid Credit Pitfalls
Despite the benefits of using credit cards, there are pitfalls that accompany. It can be costly, with some interest rates higher than 25% and whopping annual fees, finance charges and penalties that can jack up the purchase price. And you risk spending more than you can pay. Calculate how much you can afford to charge each month and then put your receipts in an envelope and keep a running total on the outside. Once you reach your limit, put away the plastic.