Credit Cards
Credit cards are short-term loans from issuers that help you build credit history while offering fraud protection and rewards. Unlike debit cards, credit card activity is reported to credit bureaus, making responsible use a powerful tool for establishing good credit for future loans and life opportunities.
What Can I Use A Credit Card For?
While you can use credit cards for large purchases or emergency expenses, it can be cost you more in the long run. Credit cards make the most sense in the following situations.
Everyday Purchases
Credit cards are best for everyday purchases, especially if you pay the balance off monthly. Some credit cards offer travel or reward programs that provide perks for using the card.
The key is not to charge over 30% of your credit limit and to pay the balance down or off as quickly as possible to ensure it doesn’t hurt your credit score and to reduce the amount of interest you will pay over time.
Retail Financing
Some retail credit cards to major stores offer an alternative to personal loans. Retailers may offer low introductory rates, sometimes even 0% financing, for a limited time, acting like a personal loan. Pay close attention to the terms because you’ll likely have to pay the balance off within a specific period to avoid accruing interest or before the interest rate increases.
Balance Transfers
If you have credit cards with a high interest rate, a balance transfer card may offer a lower interest rate, sometimes even 0%, making it easier (and faster) to get out of credit card debt. However, before choosing this option, be sure you understand the terms. There may be a balance transfer fee, usually 3% – 5% of the credit card balance.
5 Ways To Build Credit Using A Credit Card
Credit cards can be used to build good credit, but they must be managed carefully since using them irresponsibly may drive your credit score down. When building credit, you’ll want to make on-time payments as well as the minimum payment that’s due for the credit card.
1. Apply For The Right Kind Of Credit Card
Look for a card with no annual fee that reports to the three major credit bureaus. Ideally, you won’t need a low interest rate because you’ll pay the card off monthly. Interest only comes into play if you carry a balance into the next month.
Those without a credit history or bad credit may need a secured credit card. These cards are secured with a deposit you pay, which is typically at least $200.
2. Become An Authorized User On A Credit Card
If you’re having trouble qualifying for your own credit card, you can become an authorized user on a friend or family member’s card. This allows you to make purchases on the card without being responsible for the payments – though you should pay your authorized user for charges you make on the card.
But this is only a good idea if you trust the cardholder to pay on time. Why? When the primary user of the card pays their bill each month, this payment will also be reflected on your credit report, boosting your score and theirs. On the flip side, if the cardholder misses payments or makes them late, it could hurt your credit.
3. Make On-Time Payments
Lenders want to know you’re capable of making timely payments, so the importance of making on-time payments cannot be understated. Missing payments will negatively impact your score, so when making purchases with a credit card, you should always know exactly when and how you’ll be able to make your next payment. Your payment history has the most significant impact on your credit score. Making on-time payments can help you build good credit, while late or missed payments can leave you with poor credit.
4. Pay Down Credit Card Balances
Going into debt can damage your credit, as how much you owe constitutes 30% of your credit score. That means using too much of your revolving credit can drive down your credit, but keeping your credit utilization ratio low can improve your credit score.
5. Ask For Higher Credit Limits
Another way to reduce your credit utilization ratio is by asking your lender to increase your credit limit. Even if you still owe the same amount, the percentage of your available credit that you’re currently using will be lower. However, just know that requesting a credit line increase can result in a hard inquiry and temporarily dent your credit score.
Credit Cards: Pros And Cons
Credit cards have pros and cons to consider as well when choosing between a credit card and a personal loan.
| Pros | Cons |
|---|---|
| Flexible and easy for everyday purchases | Higher APR compared to personal loans |
| Potential to earn rewards | Some vendors charge convenience fees or don’t accept all credit cards |
| Responsible credit card use can build your credit | Possibility to overspend, accruing more debt than you can handle |
| Purchases can be interest-free if paid in full monthly | Some credit card companies charge annual fees |
What Are The Benefits Of Using Credit Cards?
When used correctly, credit cards can be a wonderful addition to your wallet.. Here are some key benefits:
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Learn more about credit card options, rewards and which one may be right for you:
Frequently Asked Questions
Here are answers to common questions about credit cards.
Beyond allowing cardholders to make purchases, credit cards often earn spending rewards and provide other benefits, from travel protections to concierge service. They’re known for their security benefits, too, generally offering $0 fraud liability policies and stronger federal protections than debit cards.