You might think that feel would have made me a debit and cash guy for life. As it turns out, I distillery pay for about everything with credit cards .
I fair use accredit cards responsibly now .
How credit cards work
A credit card is a orb production line of recognition that allows you to make charges at any fourth dimension ( up to the amount of a particular credit restrict ).
Reading: How to use a credit card responsibly
Before you learn how to use credit cards responsibly, you ’ ll need to know how they truly work in the first position .
You make a purchase
When you swipe your accredit card, your bank “loans” you the money to make that buy. then, you choose how much to repay each calendar month. typically, you ’ ll have the follow options :
- Make a minimum monthly payment.
- Make a partial payment.
- Pay off your entire balance.
With few exceptions, responsible credit card users always pay their balances in full every month.
You take advantage of the grace period
After you make a purchase with your credit card, the bank gives you a grace period, typically between 20 and 30 days, during which you can pay off that leverage before interest begins to accrue .
Grace periods are mighty because they give you the opportunity to use your credit card as a short, but interest-free, loanword. vitamin a hanker as you pay every penny you charged end month before the ascribable go steady, you won ’ thymine pay interest on accredit card purchases .
Read more: How Grace Periods Work – And How They Can Work For You
Where things tend to go wrong
Sooner or later, however, many people do not pay their credit card balance in full each month, turning their credit card into a revolving credit line.
finance charges ( matter to ) then accumulate on the amateur credit card remainder every individual calendar month .
Best case, a little recognition card debt costs a few hundred dollars in interest charges before you escape. Worst lawsuit, you depend more and more on citation cards to keep pace with damage caused by using them in the foremost place .
bankruptcy to make payments makes your credit score plummet and adds a belated fee to your balance. With bad credit, you could have perturb getting a car lend or an apartment lease. You might even end up in bankruptcy .
ultimately, it ends nowhere good .
hera ’ s how to use credit cards responsibly
Don’t use a credit card if you can’t handle it
If you want to use a credit batting order responsibly, your first step should be to not use one IF you know you ’ re going to overspend. Credit card debt is a serious exit, and one that continues to build on itself if the drug user continues to spend and not pay off their full moon beak on time .
It’s 100% okay to put off using a credit card if you know you’re not great at managing your money ( you do need to learn how to do that, though ) .
Read more: How To Spend Money Wisely
Build credit with timely payments
possibly you ’ rhenium superintendent responsible and promptly pay all your bills 100 % of the time. regardless, you ’ ll however have trouble getting a lend later in life if you don ’ t have a reproducible payment phonograph record on both loans and credit cards .
To improve your credit score, get a citation batting order and put a couple of purchases on it each calendar month. For exemplar, possibly you buy just a cooler of flatulence and a take-out dinner, and your entire amounts to less than $ 80. Every month when you get the bill, pay off the entire thing immediately. You should even consider setting up an automatic pistol requital so you don ’ t have to remember on your own each month to pay your circular .
Since the symmetry will be paid within the grace menstruation, you won ’ triiodothyronine pay interest. Payments are reported to the three credit chest of drawers, so every meter you pay your bill on time and in full, you build accredit .
The idea that you must pay interest or carry a balance to build credit is a myth. With every on-time payment, you ’ re automatically building credit. But if you don ’ thymine use your wag, there ’ s no payment on your commemorate .
so be indisputable to make purchases on a routine basis if you can. Don ’ deoxythymidine monophosphate go overboard, though. This will up your accredit use ( aka, how much of your available credit you ’ re using ), which will, in turn, lower your citation mark .
Read more: How To Build Credit The Right Way
Earn cash back or other rewards
Lots of people have credit cards to earn cash back or travel rewards on purchases. When managed correctly, credit cards can actually earn you hundreds of dollars a year just for using them for everyday purchases.
To truly benefit, use one or more cash rear or rewards accredit cards for about everything you buy every calendar month. If you spend $ 2,000 a month for all the versatile expenses that can be put on a batting order and get 2 % back, that ’ s $ 40 second in your pocket each month – or $ 480 a class .
Read more: Best Rewards Credit Cards – Get More Bang For Your Buck
Don’t be fooled by a few common traps, though:
- To win at this game, avoid spending more than you can afford and pay your total purchases off in full at the end of each billing period. Once you start paying interest, you miss out on any value from the rewards because the interest exceeds it. Discipline is everything.
- Chasing rewards can be counterproductive. Think carefully about your purchases so you don’t buy more than usual. The temptation is to think, “It’s okay because I’m getting cash back.”
- Finally, don’t stress about which rewards credit card to get. If your spending habits are average, it doesn’t really matter which rewards card you get – they all shake out about the same. And, if you can’t even qualify for a rewards card yet, start with a secured credit card instead (here are a few recommendations).
Track your discretionary spending
A citation calling card can become a cash run tool to help you manage monthly spend. With most of your expenses on one card, you can well see your total spend to date by viewing your explanation on-line. You can besides check your discretionary spending and see if you ’ re having a good calendar month or if you need to slow down on purchases .
much you can view spending categories angstrom good, since most credit wag companies automatically categorize your spend for you. The categories help you identify areas where your money went, such as food, gasoline, or clothe .
Combined with a Bank Account Buffer™, emergency fund, and good cash flow management, using a credit card can simplify your daily life because you don’t need to obsess about your checking account balance on a daily basis.
Read more: The Bank Account Buffer™ : Your beginning step To Financial Security
Read more: How to Apply for a Mortgage – NerdWallet
Yes, you ’ ll want to know the maximum you can spend on your credit card each month, but if your checking score is low because tomorrow is payday and you must make a big purchase today, you can use a citation calling card without worrying about overdrawing your score and incurring a $ 40 fee .
This is a danger zone, however. The dispute between credit cards helping or harming your cash menstruation is the discipline to set a spend limit .
Pay for a large purchase over time
credit cards let you pay off a boastfully purchase over meter, which is a class of finance. But unless you’re using a card with a 0% intro APR, it’s an expensive way to pay.
Considering using a credit card to pay off a large buy over a phone number of months ? Consider your options carefully :
- Can you save up the money ahead of time and pay cash?
- Can you qualify for a credit card that offers a 0% intro APR on purchases for 12 months or longer – and pay it off before the rate skyrockets?
- Would a personal loan be a more affordable way to finance the purchase than a credit card?
Do NOT borrow money at regular credit card interest rates if you can help it. unfortunately, I wholly get that there are times in life when no other options will work .
To soften the blow, search for a tease with the lowest interest rate you can get and figure out how to pay it off ASAP .
You can besides make it easier on yourself if you don ’ metric ton put anything else on that card until your purchase is paid off. That direction you won ’ deoxythymidine monophosphate get trapped into adding to your debt .
Read more: Best 0 % APR Credit Cards
Feel secure with access to an emergency line of credit
If you don ’ thyroxine trust yourself to use credit cards regularly, know that about yourself and don ’ triiodothyronine practice them .
But if you don ’ triiodothyronine have an hand brake fund – which is coarse for college students and holocene graduates – it might help to have a credit card ready for emergencies .
Simply open a tease and use it a couple of times a year therefore there ’ south action on the history. That manner it won ’ t drive closed .
Each time you use it, pay it off right away. If you ’ re uncomfortable that the credit terminus ad quem the bank gives you is excessively high, you can call and ask that they lower it. That way, you ’ ll keep the spend danger abject but inactive have something to fall back on .
Get fraud and purchase protection
One of the benefits of credit rating cards is fraud protection. If your credit card is hacked – which happens pretty frequently – money international relations and security network ’ triiodothyronine coming out of your bank account, and you don ’ t have to pay for bogus charges .
While debit card fraud is finally refunded, that money hush comes out of your account at first. This is one of the big reasons you should rethink using your debit card as your basal shape of payment .
credit cards besides come with purchase protection. If a merchant doesn ’ triiodothyronine hail through, you ’ ll get your money back .
For example, I have a acquaintance who put a $ 1,000 deposit on a patch of furniture he never got because the ship’s company went out of commercial enterprise. They took his depository, but because he put it on the credit card, the bank refunded it .
The benefits of using a citation calling card responsibly
many people avoid credit cards nowadays. They think ,
“ If I never have a accredit card, I won ’ thymine catch into a bad situation. ”
But a majority of people who use credit cards never get into debt with them .
creditworthy, strategic accredit card habit that benefits you – and not a credit wag caller – is within your achieve. Your methods depend on your purposes for using a credit menu .
You might want to build credit, gain rewards, track cash flow or use a circuit board for other reasons .
Read more: 12 Reasons Credit Cards Are Must Haves For Financial Wellbeing
How credit card companies make ( lots of ) money
The credit card companies earn a little bit of money every meter you use your card because they charge stores one to 3 % of your buy – called an exchange tip – to accept the wag. This is how they can afford to pay back rewards on every $ 1 you spend – they ’ re fair giving you a rebate of their own fees .
But, as you’ve likely surmised by this point, the banks earn the biggest dollars by charging interest when you carry a balance – in early words, you don ’ thymine pay off your purchases in full at the end of the calendar month .
credit cards typically charge concern rates between 10 % and 30 %. sol, with interest at a 15 % annual percentage rate ( APR ), if you charge $ 500 to your menu that you don ’ metric ton give off for a class, you ’ ll end up paying the deposit $ 75 in interest. If you owe $ 5,000 that ’ s $ 750 a year in matter to. Charge $ 50,000 and you ’ ll pay $ 7,500 a year precisely in interest !
The minimum payment trap
The worst function is that credit card companies make it easy to get into this situation by entirely requiring you to pay a small minimum requital each month, normally between 2 % and 5 % of your poise. sol until you hit your card ’ s credit terminus ad quem – the most the trust will let you borrow – it ’ randomness very easy to charge a bombastic remainder that ’ south difficult or impossible for you to pay off .
If you ’ re in this position, you may be able to do a libra transfer in which you transfer your balances to a fresh credit wag that has a 0 % APR for the first few months. This is a tool credit batting order companies use to get you to switch from one circuit board to another – of course, they hope that you will continue to pay them sake after the promotional 0 % APR expires.
Read more: 580 Credit Score
Whatever you do, if you get stuck with a credit card remainder you can ’ t immediately pay off, you need to make and follow a plan for getting out of debt like I did .
It ’ randomness true – citation cards can be dangerous. But you can use a credit poster responsibly and never pay a dime .
And there are many commodity reasons to do so. credit cards :
- Are instrumental in building a good credit history.
- Can give you between 1% and 2% back on every purchase.
- Make it easy to track your discretionary spending in one place and manage your cash flow.
- Offer a backup to emergency savings.
- Provide greater fraud and purchase protection than debit cards.