Rethink how you use credit

This article is the archived version of a report that appeared in July 2009 Consumer Reports magazine.

Many people use their credit cards for all their purchases to rack up rewards. And some credit-card issuers encourage that by paying bigger rewards for everyday expenses such as gas, groceries, and drugstore purchases. If you carry a balance, though, your interest charges could negate the value of whatever rewards you get—and then some.

Don't open any account you don't really need, and be careful about using the ones you do have. Credit-card companies scrutinize spending patterns to detect possible signs of financial instability, such as a layoff, divorce, or mounting medical bills. Credit-card companies have raised interest rates and slashed credit limits for people who work in industries hard hit by the economic crisis or live in regions with declining home values.

If you start using your credit card for small transactions or incidentals that you used to pay with cash or check, such as groceries or household bills, your card company might interpret that as a sign that you are overstretched financially. If you make purchases with a credit card that you don't usually use, card companies will take note of that too.

Be careful about co-signing for loans. Though you may want to co-sign your children's private student loans, be aware of the risks. Co-signing affects your credit score because the debt is considered your own. And if your child can't pay, it will hurt your score further—not to mention that the creditor will come after you if your child is late in paying, not just when he or she defaults. If your children are college students, don't allow them to be authorized users of your credit card. The safest thing for college students is to use a debit card or cash for small payments.