No need to be afraid of credit cards—if you use them wisely. Follow these guidelines to help you charge responsibly.
Credit cards are a modern convenience that make shopping easier and safer. They can be better than cash for large purchases, and they’re a good option for shopping online if you’re concerned about the security of digital transactions. You can also find useful benefits such as cash-back or rewards points that can help you with other spending needs. A credit card can also be key for establishing and building a credit history, which is essential when financing large purchases such as a car or a home.
But like many things in life, the ease of credit cards comes with an opportunity cost. Excessive use of credit over time can lead to future financial problems. But credit doesn’t have to control your financial life, if you take control of your credit and learn how be a responsible credit card user.
Use your credit card like a debit card. Make purchases on your credit card only when you have enough money in your bank account to pay for them. This approach can help you pay off debts as you realize them, while you build a solid credit report and reap rewards at the same time.
Be prudent with credit. A credit card can be useful in helping you pay for large purchases when you don’t have enough savings, as long as you have a plan to pay off the purchase in a few months. There are some purchases that are not a prudent use of credit; for instance, paying taxes, your rent or mortgage, or significant medical bills. Once you start paying for these expenses with credit, it’s easy to keep doing it. That’s a quick way to dig yourself into a hole of debt.
Make minimum payments on time. Always pay your full credit card balance every month. This is the best approach for avoiding interest changes. But there may be times when you cannot pay off your full balance. If so, you should at least pay the minimum amount due on time. Nearly all credit cards charge fees for late or missed payments, and some banks are likely to apply higher interest rates as well. Late and missed payments can also become black marks on your credit history that are hard to erase.
Don’t max out your credit. The convenience that credit cards offer is great, but that ease of use can also lead to trouble if you continue to make purchases with credit. If you don’t pay off these purchases and continue to shop with your card, eventually you’ll hit your credit limit. Carrying a high credit card balance can weigh on your credit score. If you need to carry a balance from month to month, make sure it only represents a small portion of your credit limit.