A credit card — just like any tool — is extremely useful if you use it properly. Smart people use credit cards to build credit, earn discounts, get cashback, and protect themselves from fraud. And when using a credit card for everyday purchases, there is no need to rack up unnecessary debt. Used wisely, a credit card can increase your purchasing power. In fact, it could be the first step in buying a home.
Like any tool, a credit card can do a lot of damage in the wrong hands. Imagine the damage a person could do with a power tool if they misuse it. Unfortunately, many people use credit cards irresponsibly and get themselves into massive debt.
But plastic doesn’t need to be the cause of your woes. The smart way to use a credit card is to treat it like cash. In the end, you can make a credit card work for you.
What are the smartest ways to use a credit card? This article tells you why using a credit card can be an excellent financial move.
Credit Cards vs. Cash: Which is Smarter?
It could seem that paying with cash is more responsible. You eliminate the chance of overspending because all you’ve got is the cash in your pocket. So, it’s harder to get into debt with cash.
But there are many reasons why paying by credit card is smarter — if you pay your bill in full.
Using a credit card for everyday transactions is generally more secure. Think about it — if someone steals your cash, it’s gone for good. With a credit card, your money is protected. Many credit card providers also offer protection on purchases. So, if you have got an issue with the merchant? Your credit card company will probably sort it out and protect your money.
Of course, savvy credit card users don’t use plastic for frivolous purchases.
How can you use a credit card to your advantage?
How to Use a Credit Card to Build Credit
Before looking at the smartest ways of using a credit card, it crucial to look at the long-term goals of using a credit card. You can use credit cards to build a positive credit history. Having a good credit score allows you to get a mortgage, rent an apartment, get an auto loan, and even find a job.
Here’s a scenario. You finish college with a new degree that allows you to get a higher paying job. With more financial freedom, you can now afford to buy a home. However, you must secure a mortgage. But a lender will look at your credit history before approving any loan. Even if you’re making big bucks in your new job, you won’t get the mortgage without a healthy credit rating.
Let’s see how credit cards work when it comes to your credit rating.
How credit cards work
Every time you swipe your card, you are taking out an instant loan. The credit card provider pays for the purchase, and you pay the money back later. Every card has a credit limit, which is the maximum amount of your loan.
If you pay back the “loan” within the specified time, you don’t pay interest. However, if you only pay less than the full amount, your provider will charge you interest for borrowing money.
Credit providers send information about your financial activity to credit bureaus. The credit reporting agencies use credit card activity, loan repayments, and utility payments to create a credit report with a credit score.
How credit history works
Your credit history is a profile of how responsible you are with money. For example, if you want to apply for a mortgage, a lender will see if you pay back loans responsibly. The only way you can show this is by utilizing credit wisely.
These several factors make up your credit score:
- Length of credit history
- If you make prompt loan payments
- How much debt you have in relation to your income
- The number of times you’ve applied for credit recently
- Bankruptcy and foreclosure
If you have a long credit history, avoid massive debt, and pay your bills promptly, the chances are that you’ll have an excellent credit score.
The 7 Smartest Ways to Use a Credit Card
Now you know that that a credit card — when used responsibly — can be a powerful financial tool. Let’s look at seven of the smartest ways to use a credit card to your advantage.
1. Use a credit card to build credit
One of the smartest ways to use a credit card is to build or rebuild your credit history. Staying well within spending limits and paying bills on time show that you are responsible about money. The best way to do this is to use your credit card regularly.
Instead of taking cash, swipe with plastic to pay for groceries, gas, toiletries, and other everyday items. All you need to do to build a healthy credit history is pay your bill in full before the due date.
2. Earn rewards — a smart way to use a credit card
A smart way to use a credit card is to choose one that offers rewards. You can qualify for gifts, cashback, air miles, or gift cards by making regular purchases. Some cards also offer cell phone protection, travel insurance, and other special offers.
A word of caution: Studies show that it can be tempting to overspend to “earn” rewards. So, only use the card to pay for items you’d typically buy.
3. Credit cards can be interest-free loans
If you need to make a large purchase, you can take advantage of introductory offers on some cards. For example, look for one with an introductory 0% purchase APR. Just make sure and pay the balance in full before the rate ends.
However, always read the fine print to see what you’re liable for when the offer ends.
4. Credit cards protect transactions
Paying by credit card is a smart way to get extra insurance on your purchases. Credit card companies will take up any disputes you have with vendors who sell faulty goods or services. This means that your money is protected if you’ve been ripped off.
5. Only buy what you can afford
Remember that credit cards are high-interest loans if you don’t pay the final balance on time. So, only use the card for what you can afford. If you use your credit cards as you would cash, you can control your spending to avoid unnecessary debt.
6. Always pay your bills
The smartest way to use a credit card is to pay your bills on time. Missed payments and balances that go into collection are like lead weights on your credit score — they can sink a good credit rating. You should make at least the minimum payment by the due date.
Top tip when using credit cards: Smart credit card users always pay their balances in full.
7. Watch your credit limits
If you’re using a credit card to build credit history, then keep an eye on your debt in relation to credit limits. Ideally, your card balance should never go above 30 percent of your card limit — this is called the credit utilization ratio. Maxing out on credit cards and paying the minimum payments send bad signals to lenders.
For example, if your card limit is $1,000, always keep the balance below $300. If you have more than one credit card, you should combine the limit and balance of all your cards.
The Smartest Ways to Use Credit Cards: In Conclusion
In the right hands, a credit card is an excellent way to build a healthy credit history. Additionally, you can enjoy extra perks that come with using a credit card to pay for everyday items. Used wisely, a credit card can be the first step to buying a home, getting an auto loan, or landing a dream job.