Credit cards can be a double-edged sword. On the one hand, they can be a very useful financial tool which helps you build your credit score and handle large purchases. On the other hand, they can mean trouble if you are using them to buy things you really have no place buying. Wise use of credit cards is one of the most important elements of managing your personal finances.
Some people avoid credit cards like the plague, and won’t even keep one in their wallet for emergencies. Other people rely on them on a daily basis, and end up wasting money on interest payments. Both approaches have their flaws, with the latter have many more of course. 🙂 If you can land somewhere in between these two extremes, you can use credit cards wisely and often to your benefit like with rewards you can earn such as through the U – where you earn 40,000 miles after making just one purchase in the first 90 days.
Before we talk about how to use your cards wisely, let’s take a look at a few reasons why it’s wise to have at least one credit card in your name –
- Build your credit rating. Simply by using your credit card periodically, and paying off the balance each month, you can build credit over time. When it comes time to make a big purchase, such as a car or a house, the credit you built by using your card will come in handy with a nice credit score.
- Get rewards. Many credit cards offer rewards in the way of cash back, airline miles, bonus points, or some other system. Just by using the card and paying off your bill, you can rack up points that may be redeemed for cash back or even free travel in my case. 🙂
- In case of emergency. Life is full of surprises, and it helps to have some credit available if you should happen to need it. I would typically defer to having an emergency fund for these instances. I say use both so that way if you can’t get access to the cash that day you can use the card and pay it off that month with money out of your emergency fund.
While there are several positives to having a credit card or two at your disposal, there are dangers as well. If you don’t use them in a responsible fashion, credit cards can lead to serious debt if you’re not careful.
How to Develop Smart Credit Card Habits
Follow the tips below to steer clear of credit card trouble and stay on a good financial path.
- Pay your balance each month. If you can pay off the balance of your credit card statement each month, you will avoid paying interest charges. Interest and fees are really where credit cards get expensive, so avoiding paying interest at all costs.
- Don’t buy stuff you can’t afford. This might sound obvious, but it is a common trap many fall in to. If you wouldn’t spend cash on something, don’t buy it with a credit card. After all, the day will come when you need to spend that cash to pay off your card, so always think twice before charging a large purchase.
- Find a low interest rate. When getting a credit card, shop around and find the lowest possible interest rate on your purchases. While I would always argue to pay off your credit card in full each month I know that’s not a reality for some. You’ll want a lower rate to avoid more interest. Of course, this should be a moot point though if you’re using a card wisely. 🙂
At the end of the day, wise use of a credit card comes down to common sense. If you don’t buy items that you don’t need or can’t afford, and you pay off your balance each month, you will be in good shape. Follow those rules, and you can enjoy all the benefits that using a credit card has to offer.
What are some other wise ways to use credit cards that you would recommend? What is the first thing you look at when thinking of applying for a new credit card? For me it’s the rewards. 🙂
Photo courtesy of: Lending Memo