Make Your Credit Card Work For You
Take Advantage Of This Important Financial Tool
Credit cards can be a convenient and useful tool to help you manage your finances and build your credit history. Depending on the type of credit card you get, it may offer fraud and purchase protection, and unlike cash, if your card is lost or stolen, it can easily be replaced. By properly managing a credit card, you can earn rewards and build your credit score, all while making your everyday purchases. It’s all about how you use them that makes the difference.
So, what’s the best way to use a credit card? Here are some tips so that you can help avoid racking up unnecessary debt or negatively impacting your credit.
Choosing the Right Credit Card
The first and most important step is choosing the best credit card for your needs. That means doing your research.
Secured – This type of credit card is normally an option for an applicant with little to no credit history or someone with damaged credit. A secured credit card is backed by a savings account. The money in the account acts as collateral for the credit card, and the amount helps determine the spending limit for the card. Borrowers cannot access the money in the savings account while they're using the card, but in time if the card is used properly and good credit has been established, the card issuer may offer an unsecured credit card and release the funds back to the card user.
Standard/Unsecured – This is the most basic type of credit card that is offered to an applicant. This type of card is typically given to new credit card holders to help them establish credit or to those looking for the lowest fixed interest rates without rewards. Those with higher incomes typically opt for credit cards with more options and higher limits.
Rewards - Some credit cards offer rewards like cash back or airline miles, but they may also come with a higher interest rate. Consider your spending habits and priorities when it comes to rewards. Are you an avid traveler who wants to earn miles? Will the cashback rewards be enough to balance the higher interest rate? These cards may also come with what’s called a variable rate that will fluctuate based on economic conditions or “the prime rate”.
Store Credit Cards - Store cards are credit cards that typically can only be used at specific stores. Retailers partner with financial institutions to offer credit to consumers. Store credit cards are designed to provide special discounts at the places you shop. The more money you spend at the store, the more rewards you earn and the more money you might save. Store cards may have a variety of terms and conditions, so it’s important to understand what fees, rates, and possible rewards will be involved before committing.
0% Interest - Credit card companies may offer promotional interest rates to entice you into using their product but be sure to read the fine print before committing. While 0% interest sounds like the deal of all deals there may be additional fees applied to make up for the lack of interest income. It’s important to understand the terms of usage and what interest rates or fees will apply once the promotional period comes to an end. If possible, it’s wise to avoid cards that charge annual fees or have extremely high-interest rates.
Consistent responsible usage and repayment of a credit card can have a profound effect on your credit score. It’s recommended to keep a minimal to zero balance monthly on the card if possible. The amount of debt you owe on your credit card is one of the biggest factors affecting your credit rating. That's why it's not a good idea to max out your credit card. If you do use up your entire credit limit on your card, you'll discover that your credit score will go down. If you find yourself in such a situation it might be a good idea to consider a consolidation loan to reduce the interest charge and get the debt paid down faster.
Credit Card vs Cash
It’s important to note that credit card issuers charge interest on purchases only if you carry a balance from one month to the next. If you pay your balance in full every month, your interest rate is irrelevant, because you don't get charged interest at all. Credit cards are more convenient and secure compared to carrying cash. As long as you can pay your bill in full each month then a credit card is a logical and desirable alternative to cash for in-person purchases and a necessary tool for online transactions.
When making a purchase and deciding whether or not you should pull money from your savings account or use a credit card it’s important to compare the interest you might pay if a balance remains on the card to the interest you might earn if your funds remain in the savings account. Whichever decision results in the most returns should be the ultimate goal.
Rules for Using Credit Cards
Here are some best practices to help you avoid trouble with Credit Cards:
Always pay off your credit card in full, if possible, so you can avoid paying interest and the negative effect on your credit score.
If you can’t pay it in full, pay more than your minimum due so that you pay it off faster and pay less in interest in the long run.
Avoid paying your bill late. Timely payments carry the heaviest weight when determining your credit score and will usually result in late fees being charged by the creditor.
Keep track of your credit card activity and balances by verifying transactions online or with your statement often. Unknown or unapproved charges can be reviewed and disputed with your credit issuer.
Make a budget and stick to it to avoid the overuse of your credit cards.
Always understand the terms of usage for your credit card. Most cards have different interest rates or fees for specific types of transactions like cash advances, balance transfers, and regular sale purchases. They may also require annual fees.
Don’t apply for too many credit cards. It’s normal to have more than one credit card, especially if one offers a low rate and the other offers rewards but having too many can be seen as a liability to future lenders.
Keep your credit cards open. Closing a credit card can affect your score because it can lower the average age of accounts on your credit report, especially if it's an account that's been open for a long time. The age of your accounts is factored into your credit score, with longer payment histories bolstering your bottom line.
Once you’ve decided on your priorities, search for cards that will work with your current situation. You should only apply for a card once you feel fully confident that this card will suit your needs and give you the best deal. Credit cards can be very beneficial if you know how to use them to your advantage.
If you’re interested in a low-rate credit card, consider speaking to a Financial Service Representative at First Source. Give us a call at 315-735-8571 to talk about your options or make an appointment with one of our friendly Member Service Representatives today.
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