Used right, a credit card is a great source of short-term credit that can smooth the bumps out of monthly budgeting. Your credit card can be a valuable asset if used right and an expensive liability if used inappropriately. It’s important to recognize both the risks and the benefits.
Let’s take a look at how this very common form of lending works and review tips for how to use a credit card responsibly.
HOW DO CREDIT CARDS WORK?
A credit card offers you easy access to instant credit, allowing you to borrow money on the spot to pay for goods and services from merchants who accept that card as payment. You can access the credit up to an agreed limit
You’ll be charged interest at an agreed annual percentage rate (APR), plus any additional fees. The interest is charged on any balance you hold after the billing date. Credit card interest rates are often higher than other forms of lending, such as personal loans. The rates are usually variable, meaning your APR could go up on short notice.
Credit cards are issued by a wide range of banks, credit unions, financial services providers, and merchants and are usually backed by one of the three big credit card companies: Visa, MasterCard, and American Express.
HOW NOT TO USE YOUR CREDIT CARD
If you start to accumulate significant debt on your card it can be hard to pay off, and you’ll end up spending an increasing amount of money just to service the debt. You can kick the can down the road by making interest-only payments, but this will limit how much you can use your credit card and eventually harm your credit score.
Credit card debt is convenient but can be expensive, so it’s a bad choice for:
- Buying expensive items you cannot pay off in a month or two
- Paying for unexpected expenses you will not be reimbursed for
- Covering regular costs and bills you didn’t budget for
It’s best to save up for expensive items, and if you’re struggling to pay for unexpected costs, medical expenses, or tuition, you should approach your credit union about a personal loan.
6 TIPS FOR HOW TO USE A CREDIT CARD RESPONSIBLY
The real value of your credit card is as a source of easy credit. It offers the most benefits if you pay off your entire balance within the billing period. Cheap credit can be a huge advantage when you need to:
- Cover unexpected expenses between paychecks
- Pay for things you’ll be reimbursed for
- Cover purchases you’ll be able to pay off in a month or two
Here are some smart ways to use your credit card to get the most advantages while avoiding the pitfalls.
1. MAKE PAYMENTS ON TIME
Always make your credit card payments on time. Missed payments are a major red flag on your credit report and could make it hard for you to qualify for affordable credit in the future. Missed or late payments also attract penalties on your card account and could lead to a higher APR.
2. PAY MORE THAN THE MINIMUM
Paying the minimum amount due keeps you in good standing, but means you carry a balance and pay interest so you owe a little more each month. Keep your credit cheap or even free by doing everything you can to pay off your balance in full each month.
3. DON’T GO NEAR YOUR CREDIT LIMIT
The more you put on the card, the less room you’ll have for future spending and spending more than your credit limit will attract big charges. Using a significant portion of your credit will also affect your credit utilization ratio, which will negatively affect your credit score.
4. CHECK YOUR MONTHLY STATEMENTS
One of the advantages of using a credit card regularly is that you can use the statement to track your spending and stick to a budget. You can also spot any mistakes or unauthorized charges. If you do see evidence of fraud, report it immediately. Many cards offer fraud and identity theft protection services.
5. KNOW YOUR TERMS AND CONDITIONS
Be sure to know how your card works, so you know your APR, payment due dates and what you are paying for in terms of:
- Annual charges
- Late charges
- ATM or cash back fees
- Foreign currency and other fees
6. ALIGN YOUR REWARDS WITH YOUR SPENDING
If you’re monitoring your spending, you can easily shop around for a credit card that offers rewards that match your spending patterns. Whether you opt for cash back, points, miles, or hotel nights, rewards are like money in your pocket.
BENEFITS OF USING A CREDIT CARD
Credit cards offer many other benefits besides boosting your purchasing power and earning rewards. You can enjoy a range of extra benefits, build your credit score, and take advantage of other products and services offered by your chosen credit card issuer.
You can pick a card with benefits you value including extended warranties, insurance, airport lounge access, and roadside assistance. If you’re paying off your credit card each month, then you’re not paying interest and all those perks are for free.
A credit card is a convenient tool to help you achieve your financial goals, whether you need to establish a credit history, repair credit, or build your credit score. Once approved, all you have to do is use your card for small purchases and then pay off the balance on time each month.
GET CREDIT UNION ADVANTAGES
When you get a credit card from your local credit union, you become a member of a community-driven organization. You can get friendly helpful advice and choose from an array of quality products and services.
CHOOSE THE RIGHT CARD FOR YOU
If you’re managing your card properly, paying down your balance each month, and watching your fees, you’ll know that finding a card that’s right for you can make a big difference month on month.
That credit card could be as close as your local credit union. A good local lender will take the time to understand your financial situation before recommending a card that works for you, along with the rates you deserve and benefits you can use.