Using credit cards responsibly has advantages.
Credit cards are part of our culture. They are convenient, safe and some even offer benefits.
There is absolutely nothing wrong with using credit cards if you use them wisely. If you have not yet developed good money management skills then credit card use might result in revolving high balances, poor credit scores and eventually money anxiety and stress.
On the other hand, if you are a mindful spender and have good money management skills using your credit card responsibly can reap quite a few rewards…..literally.
Of course, you can always go the route of never using a credit card, which some people swear is the only way to go. However, by choosing this method you might be missing some of the perks a credit card offers. So, why not learn how to use your credit card responsibly?
This post outlines some of the advantages of using credit cards as well as tips for using credit cards responsibly.
Credit card advantages
Credit cards have their advantages. They can be a powerful tool for your money management system. Below are five advantages.
1. Track spending
My husband and I use our credit cards for almost all of our purchases. Therefore, the majority of our expenses are listed on one monthly statement. It is a very clear and simple way to track where our money is going.
Many financial software programs have a feature that enables you to download your credit card activity, assign budget categories and generate spending reports.
Tracking your spending is a good habit. There is not one reason I can think of for not doing this.
2. Rewards for using credit cards
We all know that credit card companies lure us in with their rewards. Whether it is cash back, travel miles, or something else it can definitely be enticing.
The credit card we use offers many rewards. We get points for all of the purchases and we can use these points toward a variety of things. Because we use the credit card for just about everything we are racking up about 5000 points on average per month. That generally equates to a very nice family vacation for the five of us every other year and the best part is there is no annual fee for this card.
We have another credit card that we use for my husband’s business. That particular card racks up cash back and each year we cash it out for about $1000. Not too shabby for the annual fee of $80.
3. Insurance
Some credit card companies offer insurance if you use their card for a particular purchase. Typically it is travel insurance, but check out if they offer anything else. They may cover something you are unaware of.
Our credit card company has cell phone insurance as long as the cell phone bill is automatically paid with that credit card. We’ve taken advantage of this more than a few times and it was well worth it. There is no extra cost to us for this perk.
4. Fraud/Purchase protection
If you choose the route of no credit card use then chances are that you are using your debit card to make online purchases.
With a lot more online shopping the rate of purchase fraud has increased.
If there is fraudulent activity on your debit card, the funds are deducted from your bank account right away which can lead to a multitude of other problems such as bank charges, overdrawing on future bill payments, and maybe no available cash until it is settled. Of course, this will get handled eventually but the timing is not immediate and can be quite stressful.
With credit card fraud, the charges are reversed until the case is closed so the risk to you is minimal if any at all.
5. Building credit
Chances are that you are not going to buy your first home with all cash. It’s a great goal and if you can swing it and have the discipline to save up and wait for it then that is awesome! However, you will probably require a home loan.
To qualify for a loan you will need to meet certain requirements, such as a low debt to income ratio (this is why you don’t want a huge balance) and a good credit score.
There are a number of conditions that affect your credit score but basically if you show that you make regular payments on time and you don’t hold high balances your credit score will be fine.
Using credit cards responsibly
With all of the benefits of using a credit card, why not use one? Again, you can choose not to use credit cards (totally fine) or you can choose to use them responsibly.
Below are a few tips for using credit cards responsibly.
1. Treat it like a debit card
If you do not have the cash in your bank account to make the purchase, do NOT buy it. Don’t get in the habit of using it as a loan. It is only a means to pay for something that you would otherwise pay cash for.
2. Track your credit card transactions throughout the month.
Check your activity often to ensure that you have enough money in your account to pay your bill in full. I add a line in my check register called “credit card payment” and I enter the balance each week. Doing this adjusts the available balance in my bank account and ensures there are no surprises along the way. Most banks offer convenient ways to check your balance immediately.
3. Pay your credit card bill in full and on time every month
Paying your credit card bill in full and on time each month eliminates finance charges and late fees.
Some people say that paying off your credit card in full each month negatively affects your credit score. I cannot honestly tell you how accurate this is but since I’ve paid my card in full every month for more than ten years and my credit rating is very good so I am likely to disagree.
3. Limit yourself to two credit cards
I have two credit cards. I use one for everything and the other one is a backup. There have been times when my primary card did not work for some reason and I relied on a backup. Of course, your debit card can also be your backup if you choose to keep only one credit card.
4. Check your credit reports annually
Checking your credit report annually will ensure that any possible mistakes are taken care of. It’s much better to check it regularly than have a surprise later when it might be too late.
You can ask for a free copy of your report from each of the major reporting companies below. You are entitled to one free report every 12 months.
Equifax®, Experian®, and TransUnion®
You can also request it here: www.annualcreditreport.com.
5. Budget
Yes, there is that word budget again. If you are not budgeting then it is likely that you overspend on your credit card. Don’t get into the habit of saying you will pay it later. That is the start of a domino effect that might not end well.
Create and follow your monthly budget and you will be sure to have the money to pay that bill in full.
How to use credit cards responsibly summary
Credit cards are not evil. On the contrary, they can be quite a powerful tool if you handle them carefully.
Make sure that you always have enough money in your bank account to pay your credit cards off in full and on time each month by tracking your balances and creating budgets.
If you know that you are an overspender and credit cards are not good for you then stay away from them unless you can learn to change your spending habits. It might help to check in with your money mindset in order to make some internal mental changes that lead to better financial habits.
I believe in balance, so if you can find a way to take advantage of the credit card rewards while maintaining a great financial picture, then why not have both?
Comments or questions? Feel free to contact me. I am happy to help.
Stay balanced,
Jill