Credit card companies are deemed evil by many, especially after racking up big bills and paying high interest. However, for the most part, the irresponsible use of credit cards is what really gets people into trouble. According to a recent report, about 45% of U.S. households have some kind of credit card debt, with balances averaging $6,270. That being said, there are many benefits to using a credit card if you learn how to use credit cards wisely.
The best part is you can take advantage of those benefits while staying debt-free, too. Responsible credit card use requires discipline. (If discipline is something you struggle with, then it may be best to stick to your debit card.)
Before we get into how to use a credit card responsibly, let's first talk about how credit cards work and what some of their benefits are.
How do credit cards work?
Credit cards have many advantages and disadvantages. So, before we cover how to use credit cards wisely, we're going to explain how they 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 21-25 days to pay it back.
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 pay off their balances and go over their grace period, resulting in them paying interest — this is how credit card companies make money. And this in turn can lead to financial problems.
If you can rein in spending and hold yourself accountable to your budget, you can learn how to use a credit card responsibly.
How you can benefit from credit cards
Credit cards can be excellent financial tools if you use them responsibly. Here are three good reasons people use credit cards:
1. Credit cards are more secure
Part of learning how to use credit cards wisely is being informed of why they are more secure. Credit cards are safer than debit cards and certainly much safer than cash. If your credit card is stolen, your account is protected by the Fair Credit Billing Act, and all fraudulent charges are credited back to your account.
On the other hand, your debit card does not fall under this law (instead, it’s the Electronic Funds Transfer Act), and getting your money back can take up to several weeks, depending on the situation.
If more than 60 days have passed, there’s a chance you won’t get your money back at all. So you can see why using a credit card over debit is the smartest way to use a credit card.
2. Some credit cards have rewards
Many credit card companies offer rewards like miles and cashback 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.
In addition to rewards, you might have some extra perks for using your credit card. For example, insurance for your car rentals is a common benefit. Some credit cards also cover the costs of TSA PreCheck or Global Entry.
You just have to pick which perks matter the most to you. Getting a card with perks is the best way to use a credit card.
3. Establishing and maintaining your credit
The smartest way to use a credit card is to use it to establish and build credit. Creditors and lenders want to know what type of liability you represent when it comes to them giving you a loan, like a mortgage. They’ll look at your credit history and credit score, among other things. Your monthly credit card payments can help.
Not only are you a more attractive borrower if you pay your bills on time (and overtime), you can also get the best interest rates possible, which in turn reduces the amount of total interest you'll pay back on your loan.
5 Tips on how to use credit cards wisely
Now that you understand how credit cards work and what benefits they can provide you, here’s how to use a credit card responsibly to make sure you’re taking care of your finances.
1. Pay your balance in full each month
The best way to use a credit card is to avoid interest by paying off your credit card balance every month. Be sure you can afford the payment at the end of the month before you start spending on credit.
This means being disciplined about how much you put on the card, to begin with, so you don’t find yourself being unable to afford the balance when the bill comes due.
If you must leave a balance, make sure it is under 30% of your total credit limit. Your credit utilization ratio, the amount of available revolving credit used, is a factor of your FICO credit score. Go over 30% and your score will be negatively impacted.
Paying off your balance every month is how to use credit cards wisely.
2. Don't skip payments
Do you have a large credit card balance to pay? Paying on time is the smartest way to use a credit card. Skipping payments will wreak 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.
You can also consider doing a balance transfer to take advantage of any introductory 0% interest offers and pay off your debt faster. Just make sure you’re able to pay off the balance before the period expires.
Again, not skipping payments and avoiding additional credit card use is the best way to use a credit card.
3. Pick a credit card with benefits
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 (and paying annual fees) for no reason is counter-intuitive.
Your network may also be a great resource and can sometimes refer you for special offers. Choosing a card with great rewards is the smartest way to use a credit card.
4. Charge wisely
Not overspending is how to use credit cards wisely. 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.
The most important thing is to keep your finances in order, whatever that means for you and your wallet. So, that may mean avoiding credit card use if you have a problem with impulse shopping. Being intentional with your charging is the best way to use a credit card.
5. Don't have an abundance of credit cards
Having a limited amount of cards is how to use credit cards wisely. This will reduce the temptation of impulse shopping, and it can help you establish good credit. Also, opening several cards in a short amount of time can negatively impact your credit score.
So, have a select few credit cards that you use and try your best to resist opening too many accounts. Also, hopefully, you will never lose your wallet but not having a bunch of cards that can be stolen is another benefit to having only a few cards.
Learn how to use credit cards wisely for your financial benefit
Learning how to use a credit card responsibly is very beneficial to your finances. It can prevent you from racking up debt, earn rewards towards things like travel miles, and help you build credit. Also, using them for online purchases and while traveling is much more secure than using a debit card.
Remember, it's okay to limit your credit card use if that's easier for you to control your spending. We all make money mistakes, but try to use these tips to help you use your credit cards wisely that will benefit you financially.
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