Using Credit Cards Wisely
Credit cards get such a bad wrap. There are those who have gotten in financial trouble by living a life of “charge it”, and those that are deathly afraid to even apply for one so they don’t end up like the previously mentioned. No need to fear any longer. There is happy medium in between those two extremes that will allow you have a healthy relationship credit cards.
There are hundreds of credit cards out there, and I do mean hundreds. So there is a good chance you can find a card that fits your purchasing needs. For those in the beginning stages of building credit, and those looking to build credit, secured credit cards are always a good way to go. A secured credit card allows the customer to open the credit account with a deposit. This deposit often reflects the given credit line. For example, and $500 deposit means the card will have a credit limit of $500. Depending on the issuer, additional deposits can be made to gradually to increase the limit up to a certain point. The deposits act as a form of collateral. If the customer can not pay the debt, the funds are used to settle the account. The deposit can also be returned if the customer has no existing debt, but decides they want to close the account. Be aware that these credit cards often carry a high APR that is usually above 20%.
For those with good to great credit, cash back rewards are definitely a way to go! Reward cards repay customers with a certain percentage of the total purchase in the form of cash back. Usually these rewards can be used towards outstanding balances, and in some cases, can be transferred to a qualifying checking account. Although the concept is the same, some creditors use a point system instead of a cash back percentage. Just like the cash back rewards, points can be redeemed and used towards balances on the card.
If you happen to have excellent credit, well, the sky’s the limit. On top of earning rewards and incentives, some creditors may even offer an introductory 0% APR period from anywhere to 6 to 21 months! This means a you can carry a balance from month to month during the specified terms without being penalized with an interest charge.
Credit cards ARE NOT there to supplement your income. Let me repeat that…CREDIT CARDS ARE NOT TO SUPPLEMENT YOUR INCOME. Credit cards are a tool, not a way of life. They are not there so that you can have the expensive items you can’t afford with your regular income. Credit card companies are there to earn a profit, and when you buy things you can’t afford, their profit comes directly from the interest fees you are responsible for once the billing cycle ends. Le me explain:
Let’s say you see pair of shoes you’ve been dying to have, and you purchase these shoes on your credit card. The creditor will give you roughly 25 days to pay this balance off. For the sake of this example, I’ll make it easy. You purchased these shoes on May 1st for $600 using a card with a 22% interest rate . The credit company will give you until may 25th to pay the balance in full to avoid any interest fees. No payments were made before the cycle ended, and you receive a statement stating that your balance is now $615 (roughly). Where did this extra $15 come from? That was the interest fee the company charged you for using their money to buy your shoes. Now if you were to pay off this balance in full before the next billing cycle ends, then $15 isn’t the end of the world. But failing to pay off these balances is where people usually get into trouble. The balance is going to keep accruing fees until it is paid off in full. The less you pay means the longer this balance will remain, and fees will continue to add up, costing you much more in the long run.
Expectations can be made. If you happen to get approved for a card with a 0% introductory rate, carrying a balance won’t hurt you; so it’s actually pretty smart to apply for a card with this incentive if you are planning to make a rather large purchase. The catch is it MUST be paid in full by the end of the stated terms, or the balance will incur interest charges.
Another responsible habit is keeping all of your credit cards balances below 25% of the credit limit. If you have a credit limit of $1,000, then only $250 should be used at the end of the billing cycle. Showing creditors that you are using credit responsibly can lead to increases in credit limits, and even better, seeing an increase in your credit score!
Credit cards are not something we should fear. Credit cards do not have to lead us into financial despair. When used responsibly and strategically, credit cards can assist us with building the financial future we strive for.