Get 'smart' about credit cards
The third Thursday of every October is Get Smart About Credit Day – a day to help promote the understanding of how credit works and how to build good credit habits. Credit and the many different options can be confusing. One of the most popular credit options is a credit card. They can be a great way to build credit and increase your financial literacy, but they can also lead to trouble if you don’t use them responsibly. Let’s talk about how you can have smart credit habits.
Benefits
Let’s start with the positives. Credit cards have many benefits and when used responsibly can be an excellent tool for managing your finances. They are financial instruments that let you borrow money for a purchase, which can be useful to help you cover large purchases. Other benefits of credit cards include:
- Increased protection against fraud
- Cash back and rewards
- Perks such as discounts, travel assistance, rental car discounts
Credit cards can also be a great way for you to build credit history and improve your credit score. If you’re looking to eventually make a large purchase such as a car or home, a credit card can help prove your credit worthiness and that you can be responsible.
‘Smart’ credit habits
While credit cards can be a great tool, they can also lead to increased financial stress if your cards are nearly maxed out or making the minimum payments has become difficult. It can be easy to use the credit card when out shopping or to treat yourself, but those charges can add up. I’ve seen many people misuse credit cards because they aren’t tracking their spending or forget about interest.
Here are a few tips to help you develop smart credit habits.
1. Be the credit card company’s worst customer
Credit card companies want you to use the card so they can charge interest. If you use your credit card to make purchases, do your best to pay off the balance in full every month. If that’s not feasible, always try to pay more than the minimum to avoid a buildup of interest. Also, paying your bills on time will ensure you aren’t charged late fees or get reported to a credit reporting agency. My personal recommendation is to only charge items on a credit card that you have cash in the bank for. Set aside those dollars in a separate savings account and as soon as the statement generates, pay off the card in full. Remember, 35% of your credit score is made up by on-time payments. 30% of your score is made up of the amount you owe. Following this method above makes 65% of your score, and if done on an ongoing basis, can have a great positive impact to your credit score.
2. Ensure that it works to your advantage
Credit cards can help you make a purchase without dipping into savings, but it should be used carefully. Don’t rely on credit cards in place of building emergency savings. Make a point to set aside some money each month for emergencies. You’ll also need to factor credit card purchases and the monthly payment into your monthly budget. If you use your credit card to make purchases, don’t forget about those and make sure you have a plan to pay it back.
3. Get a card that offers bonuses
Do your research when choosing a credit card. There are a lot of different rewards and perks depending on the card you have. Think about how you plan to use the card and for what kinds of purchases. Some cards offer great rewards and cash back on travel expenses, restaurants or even gas. Choosing a card that fits your lifestyle and financial goals will help you get the most out of your credit card.
4. Educate yourself
Like any financial product, credit cards have fine print. Please read the terms and conditions thoroughly so you understand any fees and interest charges you may incur. The terms and conditions will also let you know how to redeem or qualify for any rewards it offers. Lastly, learn about how compound interest works as it will help you avoid getting charged more interest than needed.
Remember, credit cards can be a great tool when used correctly and responsibly. Many people utilize credit the incorrect way (buying fun stuff and making minimum payments each month), but if you use it for the sole purpose of building credit, you can obtain a higher score for when you need to finance a longer-term purchase (car and/or house), and doing so at a much lower interest rate. By having good credit card habits you can get the most out of them, build your credit and even enjoy some nice perks.