How To Use Credit Cards Effectively

Most people consider credit cards and the banks that issues them to be agents of the devil, especially after they have amassed big bills and have to pay high interest.

But before you start pointing fingers, it helps to admit that you do bare some responsibility for this clusterf#@k.

When used responsibly, credit cards can be a godsend, I know what you are thinking: “ but everyone I know says they suck”. To that I say, most people use credit incorrectly and wind up with debts they cannot possibly pay off.

If you are currently using a credit card, you should try to use it responsibly. Otherwise, you can find yourself in some serious financial trouble where the money has been long spent and the bill (plus interest) remains.

Before we look at how to use credit cards responsibly, let's first talk about how credit cards work and their benefits.

How do Credit cards work? Funds on a credit card is essentially a loan. When you complete a transaction using your credit card, the bank is pretty much loaning you money in advance. Typically, you will have a grace period of about 30 to 45 days to repay the loan. If you are able to repay the entire balance before the grace period is up, you will avoid paying interest. The problem is, most people don't and they exceed their grace period, resulting in them paying interest. This is how credit card companies make money.

Benefits of using a Credit card

Some of the many benefits associated with using a credit card are:

Security

Carrying a credit card is always safer than carrying cash, especially when travelling. You will not be responsible for any fraudulent charges if your card is stolen or misplaced.

Rewards Many credit card companies offer rewards like travel miles, cash back on your purchases, or points that can help you save money on future transactions. Keep in mind, however, that carrying a balance that you can't pay in full each month isn't worth any points.

Establishing / Maintaining your credit Creditors want to see your credit history and credit score to see what type of liability you represent when it comes to them giving you a loan (like a mortgage). Not only are you a more attractive borrower if you pay your bills on time (and over time) you can also get the best interest rates possible, which, in turn, reduce the amount of total interest you'll be paying back on your loan.

Using Your Credit Card Responsibly

Below are some tips on how to responsibly use your card:

Try to pay off your balance each month

Be sure that you go ahead and pay that entire balance off. My advice is to know you can afford the payment before you get those new shoes.

Don't miss Payments

Do you have a large balance on your card? Missing payments will hurt your credit history and is not good financial behavior. Instead, come up with a debt repayment plan and pay as much as you can against your balance each month until it's gone. Then, stop using those credit cards until you pay off the balance and can get a firm handle on your budgeting and spending. The goal is to not carry a balance.

Pick a Credit Card with Benefits that Make Sense for Your Lifestyle

If you are an active credit user and you have a firm handle on paying your bill in full each month, pick a card with a benefit like cash back or travel mileage rewards—something that you will actually use. Accumulating points or miles for no reason is counterintuitive.

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