Using Credit Cards Wisely
Credit cards can be a great financial instrument for short-term needs, but there are important things you need to know to make sure you’re helping, and not hurting, your financial future. So what are the key pieces of knowledge you need to make sure you’re using credit cards wisely?
What is a Credit Card?
Credit cards provide the user with a line of credit that effectively functions as a short-term loan. Generally, purchases are applied against the user’s balance, and the debt is expected to be paid off at the end of the month. Used responsibly, credit cards can provide a convenient way to make purchases and help in establishing a credit history. Used irresponsibly, or in times of great financial duress, they can be a one-way ticket to a vicious circle of debt.
What Should I Look For in a Credit Card?
Finding a credit card that’s right for you can be difficult, but it’s made easier if you know what you’re looking for. There are a lot of factors that go into finding the right one for you, so here are some of the key ones to look out for.
Annual Percentage Rate (APR)
The Annual Percentage Rate, or APR, is the card’s interest rate. The APR is expressed on a yearly basis, however, as interest is applied every month, this can work out to more over the course of the year. While the monthly interest rate may only be 2%, falling behind on your debt means that you’ll actually be negatively affected by something known as, “Compounding Interest”. When it comes to investments, this is a good thing, as it allows your money to grow and return more and more dividends as it grows.
But with debt, it works the opposite. As your debt grows, it accrues more and more debt over time. When it comes to credit card debt, this can be even worse, as it’s commonly compounded on a daily basis. So you should check any contracts for how compounding works on the card and find the one that has the lowest effective APR if you’re worried about not being able to pay off your balance on time.
Minimum Payments
One thing you’ll also want to note is the minimum repayment of the card or cards you’re looking at. The minimum payment is essentially the lowest amount you can pay on your bill so that it doesn’t become marked as “Late” and result in added fees you weren’t expecting. But if you do end up receiving those fees, you might want to take a look at a complete guide from Freedom Debt Relief on how best to work through your debt.
Annual Fees
An annual fee is one that is charged solely for possession of the card. This is often referred to as a “Membership Fee”. While this can certainly seem like a turn-off for many, you really have to look at the other pros and cons of the particular card you’re looking at to see if one with an annual fee is worth it for you. This will also depend heavily on what you plan to use the card for.
Potential Hidden Charges
Often, credit cards will have fees associated with them that the average consumer likely doesn’t know about. While they’re generally referred to as “Hidden Fees”, this isn’t necessarily true. More literally, they’re unexpected fees, mainly due to consumers not fully reading through the contracts they are signing.
That’s why it’s important to go over every nook and cranny of the cards that you’re looking at. This can help you avoid a variety of common fees associated with credit cards, like fees for a cash advance, late balance fees, balance transfer fees, foreign transaction fees, and others that may be included in contracts.
Rewards
If you’ve ever seen a commercial for a credit card, then you’ve seen all the different potential “Rewards” on offer. From cash back on purchases, airline miles, and sign-up bonuses, there’s a lot on offer. But it’s always important to compare and contrast all the potential drawbacks that come with these rewards.
What’s the annual fee like? The APR? Are there any hidden charges? And it can be even harder to find the right card if your credit score is fairly low, as this can reduce the amount of choice you actually have during your search for the best.
When Should I Use a Credit Card?
As a general rule, you should only ever use a credit card if you have the cash to back up your payments. It’s also recommended that you limit your purchases to a specific category, and if there are any reward points or cash back offers, you should use it solely on purchases that qualify. But what if you encounter an emergency, and you don’t have the money on hand to pay for it?
Is It Really an Emergency?
That’s the question you’ll need to ask yourself. Because putting a large balance on your credit card can be an incredibly risky move. It’s like taking out a personal loan for the same amount, but with far greater consequences if you can’t pay off that balance before it comes due. So let’s say for example, that your having vehicle issues and you can’t afford a mechanic. You should consider all of your possible options before you break out the plastic. You need some way to get to work.
But you don’t necessarily need your vehicle. See if you can find someone to carpool with, or if a family member has a vehicle you may be able to borrow so you can save up the funds to fix your vehicle at a more opportune time.
But, if none of those options are available to you, utilizing your credit card could very well be the difference between you having a job, and searching for a new one.
So the risk could be worth it.
Final Considerations
If you’ve done all the necessary research, found the right card for you, and planned ahead. You should be more than capable of using credit cards wisely. You also likely won’t need any credit card payment tips. And you should always remember that it’s far easier to get into debt than to get out of it before you go making any big purchases.