Friends vs. Enemies: All about Credit Cards
As most of us know, credit cards are an excellent way to build your credit score. However, without proper use, it can be a detriment to many other things. This article provides some key tips on how to properly use a credit card.
First and foremost, what is the purpose of a credit card? Investopedia defines a credit card as “a card issued by a financial company giving the holder an option to borrow funds” (“Credit Card Definition | Investopedia”). The keyword in that definition is “option.” In other words, a credit card does not have to be used all the time. Whether you plan to make daily purchases for food or a big purchase such as a TV, a credit card should be used responsibly in all circumstances.
Tip #1: Pay off the credit card balance as soon as possible.
When you make a purchase with a credit card, it is advisable to actually have the funds to cover the purchase. For example, you go to BestBuy to buy a brand new 4K TV that costs $1,500. You decide to use your credit card to make the purchase instead of your debit card or cash due to all of the benefits (discussed further below). In this case, it would be extremely beneficial to already have that $1,500 set aside, whether it’s from your savings account or cash on hand. This way, as soon as you make the purchase, you can transfer that $1,500 back to your credit card as if you made the purchase with your own money in the first place. Not only will this boost your credit score, but you will avoid interest charges, prevent any potential late fees, and rack up on rewards. Although credit cards can be used as a form of long-term financing, paying off balances as soon as possible is the best way to go, unless you absolutely don’t have the money.
Tip #2: Make most or all of your purchases with the credit card.
This ties right back to tip #1. As a responsible cardholder, making each purchase on your credit card instead of with cash or a debit card (assuming little to no fees associated with using the credit card) can provide great benefits. These benefits include a better payment history which = a better credit score, more rewards, and potentially, a higher limit on the card. The key however, is to remember tip #1 and pay off the balance as soon as possible. Additionally, don’t go over your credit limit. A good rule of thumb is to not use more than 30% of your credit limit which can also help improve your credit score.
When using this method, it is important to be cautious and pay very close attention to your account statements. If possible, link your other accounts (i.e. checking account) to the credit card account and set up automatic payments/transfers to ensure a zero balance. You can also set a budget amount each month to have some sort of guideline. If you are not comfortable with this method, there are two other basic ways of using a credit card. One method would be to use the credit card for only large purchases (i.e. the TV example above). This method will work if money has been set aside to pay off the balance immediately or can be paid off by the time the balance is due. The final and least preferred method would be to use the card only for emergency purposes. This method won’t build your credit score as fast as the other methods, but would be the lowest risk since emergencies don’t tend to come up very often. The key with all of these methods is to pay off the balance by the time it’s due. One missed payment can and will have a huge negative impact on your credit score.
Tip #3: Take advantage of reward points.
Many credit card companies offer reward points for being a loyal customer or making big purchases. Rewards such as free flights to your favorite vacation spot or cash rewards can be a huge plus. If you use your card responsibly, there will be a pool of rewards that you can and should take advantage of.
Tip #4: Stay on top of due dates.
Never miss a monthly payment. Doing so will significantly hurt your credit score. It is extremely important to know exactly what day your balance is due and to ensure that you have adequate funds to pay off the balance. This can also help you avoid interest charges. Unless it’s an emergency, stay on top of every required payment. Utilizing monthly statements and card summaries can help ensure that you don’t miss a payment.
Tip #5: Protect your card and identity.
Due to an increase in the use of technology, there has been an increase in identity theft and credit card scams in general. I would advise using online statements instead of paper statements, shredding paper documents when no longer needed, and simply avoiding information sharing with people that don’t absolutely need it.
Tip #6: Read the terms of your credit card clearly.
Pay attention to things like interest rates, late fees, “hidden” fees, cancellation fees, credit limits, reward programs, other benefits, etc. This will let you know exactly what you’re signing up for and can help you choose the best credit company.
All in all, a credit card can be your best friend or your worst enemy. When used responsibly, it can significantly increase your credit score and help you buy that dream house or car that you’ve always wanted. Instead of buying the new Jordans that come out every year, focus on making purchases that you need. A great credit score can help avoid paying premiums for a house as well as requiring a co-signer every time you apply for a loan. If you have any questions or concerns, please feel free to reach out to me.
"Credit Card Definition | Investopedia." Investopedia. 19 Nov. 2003. Web. 10 Sept. 2015. <http://www.investopedia.com/terms/c/creditcard.asp>.