Credit card companies are deemed evil by many, especially after they have racked up big bills and are paying high interest. However, when it comes to using credit responsibly, before blaming the credit card companies, it's a good idea to take a look at your behavior with credit cards first because, for the most part, irresponsible use of credit cards is what really gets people in trouble.
Yes, credit really means debt but there are many perks to using a credit card and this blog post talks about using credit cards responsibly and to get those benefits while staying debt free. Spoiler alert, responsible credit card use requires discipline and if this is something you struggle with, then stick to your debit card.
"If you struggle to use credit cards responsibly, stick to your debit card."
If you are actively using a credit card you should be using it responsibly otherwise you can get yourself into some serious financial trouble where the money has been long spent and the bill (plus interest) remains. Before we get into how to use credit cards responsibly, let's first talk about how credit cards work and what some of their benefits are.
How do credit cards work?
Money on a credit card is essentially an advance loan. When you use your credit card for a transaction, the credit card company is loaning you money in advance. Usually, you will have a grace period of about 30 days to pay it back and this basically means if you pay your balance off in full before the grace period is up, you will not get charged interest. The trouble is, most people don't and they go over their grace period, resulting in them paying interest - this is how credit card companies make money.
What are the benefits of using a credit card?
There are quite a number of benefits to using credit cards and a few included:
They are certainly much safer than cash and if they get stolen or are used for fraudulent charges you can report it and you will not be responsible for the fraudulent charges.
Many credit card companies offer rewards like miles, cash back on your purchases or points that can help you save money on future transactions. However, keep in mind, carrying a balance that you can't pay in full each month is not worth any points no matter how compelling it may seem.
- Establishing / Maintaining your credit
Creditors want to see your credit history and credit score to see what type of liability you represent when it comes to them giving you a loan e.g. a mortgage. Not only are you a more attractive borrower if you pay your bills on time (and over time) you can also get the best interest rates possible which in turn reduce the amount of total interest you'll be paying back on your loan.
How to use credit cards responsibly
Here are a few tips on how to use your credit card responsibly:
- Pay your balance in full each month
In other words, be sure you can afford the payment at the end of the month before you start spending on credit.
- Don't skip payments
Do you have a large credit card balance to pay? Skipping payments will wreck havoc on your credit and is not good financial stewardship. Instead, come up with a debt repayment plan and pay as much as you can against your balance each month until it's gone. Next stop using those credit cards until you pay off the balance and can get a firm handle on your budgeting and spending. The goal is to not carry a balance.
- Pick a credit card with benefits that make sense for your lifestyle
If you are an active credit user and you have a firm handle on paying your bill in full each month, pick a card with a benefit like cash back or travel mileage rewards - something that you will actually use. Accumulating points or miles for no reason is counter-intuitive.
Using a credit card is not a bad thing - It's safer than cash, convenient and the rewards are a plus, however (I can't stress this enough) if you struggle with using credit cards the right way, then stick to using your debit card.
How are you using credit cards responsibly? Share your thoughts below!