Credit Cards: Tips and Advice

Most consumers tend to mistrust credit cards. Credit cards don’t automatically lead you to debt, however, and can actually be used to your advantage in many ways. 

Credit cards are the most prominent form of revolving credit in the United States. But there’s a tendency to think of credit cards as a poor way to manage finances and something that should be avoided as much as possible. This isn’t helped by the fact that the average U.S. household has over $15,000 of credit card debt.

However, credit cards actually have quite a lot of advantages for consumers – once they’re used correctly.

The Advantages

Firstly, credit cards can be used practically anywhere and are extremely useful to have in an emergency. In fact, certain companies like car rental services will refuse to do business with you unless you have one.

Many credit card companies also offer rewards for using them. These rewards often come in the form of air miles, while others might give you cash-back on certain purchases. The important thing is to identify your biggest expenses and find a card that will offer the best rewards for you.

Credit cards act as a handy paper trail too. Instead of trying to keep hold of receipts and tracking purchases, all the information you need about your spending can be found by looking at your account activity. If you’re trying to budget, you can even identify the places where you’re wasting the most money!

Most importantly, credit cards help to build your credit score. At some point in your life, you’ll probably need a loan in order to buy a house or a car. When that time comes, the bank is going to want to see that you have a history of paying back your debts on time. If you have no credit history, you’ll find interest rates much higher than someone who has a solid history of paying back on their credit card.

There are so many benefits to having a credit card, but the key is to use it responsibly. In fact, it’s the irresponsible use of credit cards that give them such a bad reputation.

So how can you use credit cards to your benefit?

1. Pay On Time, Every Month

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The number one rule of owning a credit card is to pay off the balance owed every month.

You don’t want to end up swimming in credit card debt like the average consumer, so it’s important that you have your finances in order and ensure that you can pay off the card every month. Keep track of what you pay for with your card and see that you have put enough cash by to pay off the balance quickly. By doing this, you will reduce the risk of being charged late fees or paying hefty interest rates.

Paying off your credit card before it’s due will even help your credit score. An estimated 35% of your credit score is based on your payment history, so make sure you know your due date and don’t miss it!

2. Buy The Big Things

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Don’t rely on your credit card to fund day-to-day purchases.

Using your card every time you go grocery shopping or to the gas station means that your charges will not only be a lot more frequent, but also harder to track and monitor. As we all know, smaller charges tend to quickly build into a significant sum of money that you might not have planned for.

In order to keep track of your bill, try to limit the number of small purchases you make on your credit card and only use it for larger, more significant buys.

Try to only use your credit card for considerable or noteworthy purchases, like a new laptop or phone. You’re much more likely to remember and track a large purchase that cost $500 over fifty smaller $10 purchases throughout the month.

Use cash or a debit card for the smaller payments instead. In doing this, you’re making sure that you know exactly how much your bill will be when it comes time to pay it.

3. Be Wary Of Minimum Payments

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One of the biggest ways consumers get caught out is by making the ‘minimum payment’ on the card.

It’s an attractive option—simply paying the basic requirement every month to keep the bank off your back. In fact, the minimum payment is usually very low… perhaps only a few percent of the full balance.

But this is done purposely by credit card companies to discourage you from paying off the full balance. And this is exactly what gets credit card holders into trouble.

Although making the minimum payment will not affect your credit score, it will mean that interest is still being charged on the remaining balance. The larger the balance, the higher the interest to be paid. Many cardholders simply pay the minimum payment every month and let that interest grow for long periods of time. The credit card companies then profit from increased interest paid on higher balances, and it’s the cardholder that ultimately loses out.

Ignore the minimum balance option and pay off the entire balance every month. It might seem like a big financial hit when you’re paying it, but deferring it will only cost you more in the long run.

4. Don’t Cash In

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It might be tempting, but never use credit cards to withdraw cash!

Not only do credit card companies usually charge a higher interest rate cash withdrawn from an ATM, but the interest on that cash is usually charged immediately.

Some experts also say that withdrawing cash using your credit card is also bad for your credit score. Many financial institutions assume that if you are withdrawing cash on your credit card, you’ve exhausted the funds in your bank account.

If you’ve applied for a loan and a lender is searching your record, cash withdrawals from a credit card could be seen as a sign that you can’t manage your money, inevitably leading to questions about your ability to pay back.

If you find yourself using your card for this purpose regularly, switch to a debit card.

And Remember…

Credit cards are there as a necessary convenience, not as an alternative to living within your means. Abusing credit cards will leave you with mounting debt that could take years to pay off.

If you find yourself in trouble, don’t ignore the issue. Your card issuer has no interest in seeing you default on your debt. They will usually be much happier to work out an alternative payment scheme with you.

 

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