Credit, in the form of credit cards, is something most of us want, need, and use almost every week of our adult lives. Learning how to use a credit card wisely helps us to save money in the long run and avoid the trap of ongoing debt. Many of us use credit cards for convenience, so that we can avoid carrying cash in our pockets for purchases like groceries, gas, and household items. This makes sense when done with responsibility, thought, and keeping your budget foremost in your mind. Many advisors say to pay cash for everything and avoid credit cards entirely. I disagree. Credit is important to have and protect, and to learn to use wisely.
Why is credit so important?
Having good credit is important in a number of ways. You get the best credit interest rates by having a good credit rating and history. Hopefully, you never have to use those interest rates, but in an emergency, it can be vital to have credit available and at a low interest rate. For larger purchases, such as a home or a car, you may require good credit to qualify (if you’re unable to pay cash) and those lower interest rates can add up to quite a bit of savings. Credit ratings and history are also being used to evaluate a person’s trustworthiness, and may be accessed when you apply for an apartment rental, or even a job.
What does good credit mean?
When we say someone has good credit, it means a combination of things. Typically it means they have open credit available, but not too much. They have a good and lengthy payment history. And it means they don’t have inappropriate debt levels. If someone has never used credit, they don’t have a track record for using it wisely. So it’s important to use it when you don’t need it, so you’ll have a track record for when and if you do need it.
There are rules you need to follow to insure:
- You have credit available
- You use your credit wisely and within your budget
- You have a good or excellent credit rating
- Your credit history is accurate
- You have credit available for emergencies
How to use a credit card wisely
If you’re just starting out with credit, here are my rules for credit safety:
- Seek out a reputable credit card. Check interest rates as they can vary considerably depending on your history or lack of one. Check online to see what the going rates are in your local area since they can vary by state. Check terms, fees (be sure you don’t have to pay them!), and other variables before you make any commitments. Check rewards, incentives, bonuses and other variables. If you qualify for a special card as a student, senior, or union member for example, check the advantages of using such a card.
- Limit yourself to no more than 2 cards per person. Spouses should have a card and establish their own credit history. Once you have established a credit history, and have proven that you can use a credit card responsibly, you may wish to open more accounts, but do so sparingly.
- When making monthly purchases, use credit only as a convenience and stay within your budget. Pay off the bill in full each month! This should always be your goal for routine purchases like groceries and gasoline. And avoid cash advances at all costs…your credit card is not an ATM.
- Keep accurate records and receipts. You can track your spending with pen and paper, a spreadsheet, expense software or an app. But you should know what you owe before the bill arrives (at all times, really) and be able to tell if there is an error on your statement. Check your bills each month to verify accuracy of transactions as well as rewards, such as points or cash back.
- Pay all bills on time and in full. Even one late payment can raise your interest rates on certain credit cards.
- Once you start building a good history (maybe a year), ask for a lower interest rate. It’s almost always granted.
- Look for and take advantage of credit promotions on your card but never extend or obtain credit simply because of a promotion!
- Check your credit report at least once a year to insure accuracy. By federal law (US), you are entitled to check your credit reports for free once every 12 months and correct any errors at that time. You can go to annualcreditreport.com to receive your free reports from the 3 nationwide credit reporting services. However, it will not include a credit rating. Some credit cards offer to show you your credit rating for free, and there are also some websites that will do so (just be sure you aren’t signing up for any paid services in the process). Be aware that this may not be the same credit rating as the one lenders use, but it should give you a good general indication.
However, if you’ve used credit for awhile, and perhaps have accumulated some debt or even late payments, you may need to take a step back. Stay tuned for future posts on how to manage your credit situation.
Do you know how to use a credit card wisely for everyday purchases? Do you choose to use them? Why or why not?