Credit cards can be a useful tool and don’t have to be something for you to avoid. If used properly, they can provide plenty of benefits. Abused, and they can bury you in debt. Learn how to use them responsibly, and the many benefits to their regular use.
There is a myth that credit cards should be used to purchase things that you currently don’t have the money for. I’d like to dispel this myth. By using credit cards this way, you are not only putting yourself into debt, and starting down a slippery slope, but you’re also paying more for the product than what you’re actually paying for it. According to the site valuepenguin.com, the current credit card interest rate is nearly 14%. With that rate, the $100 purchase you just made now costs you $114 after the first month. After two months, it’s up to $129.96.
Now, that example isn’t perfect, since it doesn’t include any payments made towards the card, but it still serves as a good illustration. You’re paying more than what the product actually costs.
Next, there’s that slippery slope to consider. You start off by charging a few items to your credit card and you notice how little the minimum payment is. Wow, you can really afford that! But then, you buy a few more things, thinking that you can just continue to pay the low minimum payment. This continues on as the total balance gets bigger and bigger. Before you know it, the minimum payment is near the limit of what you can afford. Does any of this sound familiar? If so, I bet you’ve also noticed how difficult it is to pay that balance down doing just the minimum.
If this scenario is hitting home, I suggest stopping right here and taking a look at this before you continue.
How to Use a Credit Card
You may have guessed by now that the scenario above is NOT the responsible way to use credit cards. So what is?
To start off, I recommend only opening 2-3 different credit cards and pick ones that provide rewards. There’s plenty to choose from, and many different categories of rewards. Find ones that suit you best (nerdwallet.com), and go from there.
For us, we each have a Chase Rewards card that offers points towards gift cards, cash back options, or rewards that can be used as a payment option on Amazon. We also have a Chase Disney card that gets us rewards that can be used in the Disney Store and at the parks. We’re both huge Disney fans that try to visit the parks once a year, so this one is useful for us. Another that we recently opened is a gas card that saves us $0.05/gallon every time we buy gas from this particular chain (Wawa for those of you reading in the PA, NJ, DE area… FL too now).
There’s bound to be choices that fit your lifestyle. Find the right cards, and put them to work for you.
And not only will the credit cards provide their advertised benefits, but they are also more secure than debit cards. If you get fraudulent charges to your debit card, you’ll often lose all your money in your checking account. At least for an inconvenient period of time, making it harder to pay your bills on time. If there’s a fraudulent charge on a credit card, you’re typically notified by the credit company, the card gets put on hold, and you get sent a new card with a new number, and then things go back to normal.
Don’t Close Them!
If you have any that have a zero balance and haven’t been used, but don’t offer any kind of benefit or reward, it could be tempting to just close that line of credit. However, as a general rule, this isn’t the smartest move. Your credit score is calculated based on many different factors, and one of them involves the longest “relationship” you have with a creditor. This typically means the credit card you’ve had open the longest.
Another factor used in determining your credit score is your debt to credit ratio (smartasset.com). That unused credit card is adding to your overall credit limit, which gives you a better “debt to credit ratio” and helps improve your credit score. In a nutshell, if you have a lot of available credit, but only use a small portion of it, that’s a good thing.
An exception to the rule would be, if there are any annual fees for the credit card. In a case like that, I would suggest that you’re better off financially to take the minor hit to your credit score than to be stuck paying those fees. You can always build your credit score back up over time, but you’ll never get money back that has been lost to unnecessary fees.
Take a look at this post for some additional thoughts on the importance of your credit score.
Spend What You Have
You’re all set with your credit cards now, right? Wrong! Simply picking the right credit cards isn’t all you have to do. When using a credit card, it’s important that you pay off your FULL BALANCE every month! I’ll say that one more time to make sure it sticks. Pay off the full balance every month.
This is where your budget comes into play. You need to track all your money coming in and all of your money going out. This way, you can clearly see if you’re getting close to your limit on fast food for the month, or have enough money left for groceries.
Also, with an established budget, you should already know your typical spending habits. Because of this, you don’t really need to worry a whole lot about your day to day spending. You should keep an eye on it, but don’t need to check it every day. The important purchases to keep an eye on are the irregular ones. Those impulse buys at Target, or that little “gift” to yourself. You should always check your budget before these types of purchases whenever possible, and ask yourself, “Do I really need this and can I afford it?”
A credit card doesn’t need to be feared. It can be a useful tool and is helpful in improving your credit score. Learn how to use it responsibly and it will go to work for you!