Written by: Katherine Starrett
Whether you’ve had a credit card for years or you’re thinking of applying for your first one, here are a few things to keep in mind when applying for or using credit cards.
Credit cards can have several uses:
- They can help you establish a good credit score.
- You can earn points, miles, or cash-back and gain access to exclusive deals and perks.
- They can also help you buy things that you don’t have the money for.
Number 3 is what can get you into trouble.
The credit limit on a credit card is like a loan. If you have a $1,000 limit on a card, the credit card company is saying: “We’re willing to let you spend $1,000 of our money with the understanding that you will pay us back by the end of the month.” If you don’t pay them back in full, you’ll be charged interest on whatever you don’t pay.
Most credit cards have a minimum payment that is much lower than whatever you spent that month, and you may be tempted to only pay the minimum payments, but that is a quick and easy way to ruin your credit. As you charge more to that card, your outstanding balance will grow as well as the interest you have to pay, which for credit cards is much higher than for other loans (usually between 12 and 25%). Generally, you don’t want to charge any more to a credit card than what you’re sure you can pay off at the end of the month.
If you’re having trouble keeping track of your purchases, all cards these days should come with an online account, which you can check regularly to see your purchases and pay your balance. Additionally, most cards will probably have an app associated with them that you can use to see your balance from your phone.
Some people get credit cards because they intend to make one big purchase that they can’t afford at the moment like a new computer or a vacation. Not advisable, because you’ll end up having to pay interest on that purchase, making you ultimately shell out more for the product or experience than the market value.1 As long as the expense isn’t something vitally necessary at the moment, a better way to go about big purchases is to save for them. Put a little more in your savings than usual each month until you have enough (with plenty left over for your normal savings) to buy whatever it is you want.
Credit cards can also be useful in emergencies: if you have to travel somewhere to see a sick loved one or attend a funeral, and you don’t have enough money in your bank account, you can put those charges on your credit card and pay them off as soon as possible.
When considering what kind of credit card to get, remember not to take every offer. Everyone gets a ridiculous amount of credit card offers in the mail. Read them carefully. Many are junk. Limit yourself to a few that are ideal for you personally.
While this might seem silly, it is possible that a credit card company might offer you a much higher limit than you can reasonably pay off in a single month. Remember that credit card companies get the bulk of their money from interest and other fees associated with periodic or late payments. If you pay your bill in full each month, you’re basically a deadbeat to them because you’re not making them money. This is the one time when it’s good to be a deadbeat.
Overall, if you have good credit, the best way to use a credit card is for the benefits it can get you such as points, cash-back, or other perks. Some stores (like large department stores or retail chains) will have credit cards that give you a certain percentage off on every purchase at that store, and if you shop there a lot, that can be very beneficial. If you travel frequently, an airline card or something that can translate into airline miles could save you a good amount of money. If you have bad credit, certain credit cards can help you build it back up. (For more on different types of credit cards check out this article by NerdWallet on How to Pick the Best Credit Card.)
Basically, if you charge your monthly purchases like food, gas, and entertainment to your credit card, knowing that you’ll be able to pay the full balance at the end of the month, you can enjoy the perks and build up good credit without having to pay extra.
1 The exception to this may be if you are able to get a card that offers no interest for a few months, and you know that you will be able to pay it back before interest starts to accrue. But be sure to look carefully at the terms and conditions as well as your monthly budget before you decide to do this.
