Credit cards get a bad reputation, and not without reason! They’re incredibly convenient, but that convenience can lead to mountains of credit card debt. However, when credit cards are used wisely, they can be a huge boost to your credit score, and the benefits of certain credit cards can really pay off! Here are some smart ways to use a credit card so that it works as a savvy financial tool, not a shortcut to debt.
Transfer Debt To A 0% APR Card
Some cards offer an introductory 0% APR (annual percentage rate) for a year or even longer. If you’re saddled with more debt than you can handle, apply for one of those credit cards. You can then transfer the balance of other credit cards or bank loans onto this new card. This lets you pay those balances off without the extra hundreds of dollars of interest that you would have paid otherwise. Be mindful, however! These 0% APR cards often jump up to a much higher interest rate once the introductory period is over. Use this card only for chipping away at existing debt – not for new purchases.
Pay Off The Monthly Balance In Full
One of the conveniences of credit cards is that you don’t have to pay off the balance each month. However, this is the slippery slope to debt mountain because not only will the balances compile, but the interest will as well. Instead, pay off the balance of each month on time and in full. No minimum payment nonsense! Not only does this keep you from a debt spiral, but it will also reflect well on your credit report. Your credit card payment history accounts for 35% of your credit score, and a good credit score opens a multitude of financial doors.
Get A Sign-Up Bonus
If you are already sitting on a great credit score, you might qualify to be approved for a credit card with a sign-up bonus. These bonuses can be anywhere from $100 to $500. Beware, however – this “free” money comes with a catch. To get that bonus, you’ll need to charge a certain amount in purchases to the card over a certain period. Usually, it’s between $500 to $3,000 within the first 90 days. If you’re not paying off your balance monthly, those quick purchases to reach the sign-up bonus can be too much debt to handle. If not paid off quickly, the interest on those purchases can even cancel out the bonus altogether. If you already have the money saved in the bank to handle those purchases outright, then opening a card with a sign-up bonus can be a savvy way to play the game and get a little extra cash.
Purchase Protection
Purchase protection is a program that many credit card issuers offer. It means that they will reimburse you up to a certain amount for certain items that you purchased with the credit card if that card is then lost, stolen, or damaged within a specific time frame. Each purchase protection program varies, so read the fine print. Purchase protection is handy when buying something more expensive, like a home appliance or electronic device. Just remember to pay off that monthly balance in full!
Build Good Credit
For better or for worse, our financial system focuses to a substantial degree on whether you can be in debt wisely. While you can avoid credit card woes by not having one at all, it’s harder to build a good credit score that way. Your credit score will be heavily influenced by if you pay off your debts in a timely fashion. To do this, you need to have debts! Open a credit card and use it for even just one or two small purchases each month. Small purchases – like a cup of coffee or one tank of gas, or a couple of groceries. Then, pay off that small balance in full every month. Even with those few monthly purchases, you’ll see your credit score rise significantly in a short amount of time.
Use It As A Budget Tool
Opening a credit card doesn’t have to blow your budget out of the water. On the contrary, a credit card can be a great cash flow tool. Most credit card companies will automatically categorize your spending for you. If you pay for most of your expenses with your credit card (remember – pay that balance off in full each month!), then you’ll be able to identify quickly where your money went. It’s nice to be able to see quickly how much you spent on eating out or gas at any given moment.
Have An Emergency Line Of Credit
If you don’t trust yourself by regularly using a credit card, that’s great self-knowledge. Don’t use them. However, emergencies happen. It’s wise for everyone to have an emergency fund set aside in a bank. For college students or recent graduates that don’t have that fund filled yet, it can be peace of mind to have a credit card already applied for and opened. You can call and ask that your credit limit be lowered if the temptation is too much. Use it a couple of times a year, just so that there’s activity on the account, but otherwise, don’t even touch it. If your car gets stranded or another genuine emergency occurs, you won’t be left in a lurch. A word to the wise – be firm on your definition of “emergency.”