How to Use Credit Cards Responsibly
We’ve all heard horror stories about people racking up unmanageable amounts of credit card debt. While concern over consumer debt can lead to the avoidance of credit cards, when used responsibly, credit cards can be a useful financial tool.
According to a 2019 study by ValuePenguin, 41.2% of Americans carry revolving credit card debt. Revolving credit card debt is a credit balance that remains on an account from month to month. This study suggests that many Americans could be using their credit cards more responsibly.
Ideally, no one should have revolving credit card debt.
In today’s post, we are walking through how credit cards work and how to use credit cards responsibly!
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How Credit Cards Work
When approved for a credit card, your bank gives you a line of credit that you can borrow from when making purchases. When you swipe your credit card, you are essentially taking out a small loan from the bank on that item.
After the purchase, there is typically a 20-30 day grace period before the balance starts accruing finance charges (also known as interest). The problem many consumers face is that they do not pay off their balance at the end of the month, which causes them to lose money on interest.
Interest payments are the primary ways that credit card companies make money. If you read my post on Compound Interest and How It Can Help or Hurt You, you will see how quickly those interest payments can add up in the bank’s pocket.
In fact, banks make it easy for you to start losing money on interest by only requiring a “minimum payment” to keep your account in good standing. A minimum payment is typically either a fixed amount or a small percentage of the outstanding balance. If you only make the minimum payment on your balance each month, you can quickly get caught in a loop of mounting credit card debt and interest charges.
Benefits of Using A Credit Card
When used responsibly, there are some major benefits that come with using credit cards:
More security from fraud than debit cards
Purchase protection
Cash back/travel and mile bonuses
Establish and build credit
Universally accepted by hotels, restaurants, and other vendors.
How to Use A Credit Card Responsibly
Before we talk about how to use credit cards responsibly, it is important that you listen to your gut and know your limitations. Responsibly using a credit card takes self discipline--if this is something you struggle with, it might be best to stick with a debit card for the time being.
Pay your balance in full each month
In order to avoid paying interest on purchases, pay off your credit card balance in full each month.
To do this, make sure that you can afford a purchase before you make the decision to buy it on credit. This means avoiding impulsive purchases, and only using your credit card for items that are planned in your zero based budget.
This goes without saying, but never, ever, ever, skip payments. When you skip a payment on your credit card (or any other type of debt), you will needlessly lose money in late fees and make huge dents in your credit score.
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Stay below your credit limit
If you cannot pay your balance in full, make sure it stays below 30% of your credit line. This gets factored into your credit utilization ratio (the total amount of revolving credit divided by your total credit line between all accounts).
The higher your ratio gets over 30, the more it will negatively affect your credit score. A high credit utilization ratio implies that you are overextending yourself financially.
Pick a card that makes sense for your lifestyle
If you decide to apply for a credit card because of its rewards programs, make sure that the rewards align with your lifestyle and goals.
If you have no interest in traveling, it doesn’t really make sense to apply for a credit card that offers flying miles and other travel incentives.
Websites like NerdWallet have really amazing articles comparing different rewards programs between credit cards.
Read your card agreement and know it’s terms and conditions
When you open a new credit card, it is so important to thoroughly read your card agreement, disclosures, and terms and conditions. This ensures that you can anticipate due dates, interest rates, fees, and other important information.
Need help understanding the lingo in your card agreement? Check out this article by Capital One.
Check your credit card statements for accuracy
Mistakes can (and do) happen on your credit card statement. In fact, I recently found a duplicate charge on my credit card account!
Make sure that your credit card is accurate each month. If you find any errors, immediately report them to your credit card company--it could be a sign of fraud.
Immediately report a lost or stolen card
One of the benefits of using a credit card is the added security it provides. Many credit card companies offer $0 fraud liability so that you don’t have to worry about paying for transactions that were made without your permission.
If you have lost your card or suspect that it’s information may have been stolen, immediately report it to your credit card issuer. They will deactivate your card so that it cannot be used anymore and send you a new one.
Spend Wisely
Credit cards are not innately bad--they offer many benefits and incentives for people who are able to use them responsibly.
However, I cannot stress enough how important it is to know yourself and your limits! If you struggle with self-discipline and controlling your credit card usage, then stick to cash or a debit card.
At the end of the day, the benefits of using a credit card do not outweigh debt. The most important thing is to do what’s best for your personal finances.
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