The Potential of Owning a Credit Card if Used Properly Can Be a Powerful Financial Tool
Mounting debt in American households causes many people to believe in the misconception credit cards are dangerous. Credit cards don’t send people spiraling into unaffordable debt. It’s the person using the card in an inappropriate manner who causes their family to spiral into debt. Whether you have bad credit or excellent credit, a credit card is a convenient and exceptional financial tool when it’s used correctly. Understanding how credit cards benefit the person who carries is crucial on the path to financial success.
Owning a credit card is the safest way to spend money in many instances. Families who use their credit card online are safer than those who use a debit card. Credit card companies are quick to put a stop to fraudulent purchases when a card is compromised. Cardholders are not responsible for any fraudulent purchases made using a card stolen from a family. Credit card companies also pay attention to spending habits and flag any purchases that look suspicious. They contact the cardholder to discuss those purchases before they verify anything.
Booking a rental car or hotel room is far easier when a credit card is used. Not only is it safer to use a credit card for these purchases, it’s more affordable. Many car rental agencies won’t even rent a car to anyone without a major credit card on file. Others don’t require a credit card, but they run a credit check on anyone who uses a debit card or cash. Others will rent a car to anyone, but they require a debit card they can use to place a large hold on. This hold equals the amount of the car rental and taxes in addition to a standard $200 hold.
A hold like this means those funds are not available to spend in a person’s bank account. It can take up to a week after the rental is returned for the company to release this hold, meaning those funds are unavailable for an undetermined amount of time. Hotels do the same, but they charge a hold to a bank account using a debit card for each night of the reservation. Using a credit card doesn’t tie up anyone’s funds.
Building Credit and Saving Money
The misconception is people don’t buy things they can’t afford to pay cash for, so they don’t need a credit card. It’s a great concept, but people forget there are several things in life they might purchase that they do need credit to purchase. A house is a great example. Someone who’s never owned a credit card might not be able to buy a home because they have no credit history. Someone who has very little credit to their name might not have enough of a credit history to purchase a home even if they have substantial income.
Using a credit card wisely builds a person’s credit history so they can buy a home, get insurance, and build a great credit score. The higher a person’s score, the lower the rates they’re offered. Lower rates are available on mortgages for those who can prove they have a good credit history.
Most people are unaware they can make money with their credit card. This occurs through the rewards programs offered by most major credit cards, whether they’re travel or cash back cards. Use a cash back card as an example. Someone who applies for a cash back card and earns 1.5% cash back on all purchases they make has the potential to make money on every purchase. Spending only $3,000 per month using their cash back card earns $45 per month in cash, which equals $540 per year.
If someone uses their credit card wisely, they can earn much more than that. Instead of running up charges each month people can’t afford, the wisest credit cardholders use their cards to pay their monthly expenses each month. They pay their mortgage, car loans, insurance, cell phone, buy their groceries, and anything else they need with their cash back card rather than using their available cash to make these purchases. At the end of the month, they use the cash they would otherwise use for these purchases to pay off the balance of their card. It allows them to earn money for paying their bills and making everyday purchases.
Using Credit Wisely
The benefits of owning a credit card only work if consumers learn to use their cards correctly. There are several basic rules to using credit wisely everyone should learn before they’re old enough to even apply for a card, but financial success isn’t something taught in school, and many parents fail to teach their kids the importance of using credit.
- Don’t apply for every card offered. Too many inquiries and too much available credit affects a person’s ability to apply for more credit, such as a home loan, even if they haven’t a balance on any of their cards.
- Pay off the balance in full each month. Carrying a balance is a terrible idea with a credit card. The concept of not making purchases a person can’t afford to pay cash for applies to credit card purchases as well. Consumers should only make purchases when they have cash in the bank to pay for them so they can pay the balance in full each month.
- Anyone who must carry a balance should keep it below 30% of the available credit. If a credit card has a $10,000 limit, the cardholder should keep any revolving balance under $3,000. This is favorable for credit scores.
- Pay on time all the time. Making even one late payment only a day late is all it takes for creditors to raise a person’s interest rate, tack on fees and late charges, and affect their account standing negatively.
Using credit wisely isn’t difficult when people understand how their credit card spending habits affect their financials and their future. Credit cards are highly beneficial to those who have them, but only if cardholders are smart in their spending habits.