Credit, in the form of credit cards, is something most of us want, need, and use almost every week of our adult lives.
The Importance of Credit Cards
Learning how to use a credit card like a pro helps us to save money in the long run and avoid the trap of ongoing debt. Many of us use credit cards for convenience to avoid carrying cash in our pockets for purchases like groceries, gas, and household items. This makes sense when done with responsibility, though, and keeping your budget in mind.
Debunking The Cash-Only Myth
Many advisors say to pay cash for everything and avoid credit cards entirely. I disagree. Credit is important to have and protect, and to learn to use wisely.
In this article, let’s explore how to use a credit card in the best possible way.
Why Is Credit So Important
Having good credit is important in a number of ways. You get the best credit interest rates with a good credit rating and history. Hopefully, you never have to use those interest rates, but in an emergency, it can be vital to have credit available and at a low interest rate. For larger purchases, such as a home or a car, you may require good credit to qualify (if you’re unable to pay cash), and those lower interest rates can add up to quite a bit of saving. Credit ratings and history are also being used to evaluate a person’s trustworthiness and may be accessed when you apply for an apartment rental or even a job.
What Does Good Credit Mean?
When we say someone has good credit, it means a combination of things. Typically, it means they have open credit available, but not too much. They have a good and lengthy payment history. And it means they don’t have inappropriate debt levels. If someone has never used credit, they don’t have a track record for using it wisely. So it’s important to use it when you don’t need it to have a track record for when and if it is ever needed.
Guidelines To Follow for Effective Credit Management
Managing your credit involves several key aspects. Firstly, maintain available credit by using it responsibly and repaying debts promptly. Second, use credit wisely within your budget to avoid overspending. Additionally, prioritize building a good credit rating through on-time payments and responsible credit use. Regularly check your credit history for accuracy. Lastly, keep some of your credit available for emergencies to provide financial flexibility during unexpected situations.
How To Use a Credit Card Wisely
Mastering responsible credit card use involves a series of essential steps, encompassing everything from choosing a reputable credit card to diligently monitoring your credit score. While each step demands thoughtful consideration, they can all be successfully accomplished with practice and dedication.
Step 1: Select a Credit Card With a Strong Track Record
Seek out a reputable credit card. Check interest rates, as they vary considerably depending on your history or lack of one. Check online to see what the going rates are in your local area since they can vary by state. Check terms, fees (be sure you don’t have to pay them!), and other variables before you make any commitments. Check rewards, incentives, bonuses, and other variables. If you qualify for a special card as a student, senior, or union member, check the advantages of using such a card.
Step 2: Start Slow and Build From There
Limit yourself to no more than two cards per person. Spouses should have a card and establish their own credit history. Once you have established a credit history and have proven that you can use a credit card responsibly, you may wish to open more accounts, but do so sparingly.
Step 3: Use Credit Responsibly for Routine Expenses and Steer Clear of Advances
When making monthly purchases, use credit only as a convenience and stay within your budget. Pay off the bill in full each month! This should always be your goal for routine purchases like groceries and gasoline. And avoid cash advances at all costs…your credit card is not an ATM.
Step 4: Maintain Accurate Records and Check Statements
Keep accurate records and receipts. You can track your spending with pen and paper, a spreadsheet, expense software, or an app. But you should know what you owe before the bill arrives (at all times, really) and be able to tell if there is an error on your statement. Check your monthly bills to verify the accuracy of transactions and rewards, such as points or cash back.
Step 5: Pay by Due Date
This is Perhaps the Most Important Step Towards Good Credit. Pay all bills on time and in full. Even one late payment can raise your interest rates on certain credit cards.
Step 6: Request a Lower Interest Rate
Once you start building a good history (maybe a year), ask for a lower interest rate. It’s almost always granted.
Step 7: Keep an Eye Out for Promotions
Look for and take advantage of credit promotions on your card, but never extend or obtain credit simply because of a promotion!
Step 8: Regularly Monitor Your Credit Report for Accuracy
Check your credit report at least once a year to ensure accuracy. By federal law (US), you can check your credit reports for free once every 12 months and correct any errors. You can visit annualcreditreport.com to receive free reports from the three nationwide credit reporting services. However, it will not include a credit rating.
Assessing Your Ongoing Credit Card Usage
Some credit cards offer to show you your credit rating for free, and some websites will do so (just be sure you aren’t signing up for any paid services in the process). Be aware that this may not be the same credit rating as the one lenders use, but it should give you a good general indication.
If you’ve used credit for a while and perhaps have accumulated some debt or even late payments, you may need to take a step back. Do you know how to use a credit card wisely for everyday purchases? Do you choose to use them? Why or why not?