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Knowing how to use a credit card is key to making sure you’re financially stable and building good credit history.
Many people use their credit cards in ways that can damage their financial wellbeing in the long term.
The average American household with a credit card has more than $8,000 in credit card debit.
We’ll go through the benefits and dangers of using credit cards, so you can rest easy when signing up for a new card.
Why should I get a credit card?
A credit card is a line of credit. You can use this borrowed money to buy things, as long as you don’t go over the credit card’s limit, the maximum dollar amount you’re allowed to borrow.
When you make a purchase on credit, you’re using borrowed money. That money must be paid back. If you don’t pay the money back on time, there are severe consequences.
Use your cards carefully.
One reason to get a credit card is to build your personal credit, which is trustworthiness score you have for paying back loans.
Personal credit is tracked and reported by professional credit reporting agencies.
Personal credit is important because it’s used to determine if you qualify for larger loans like home mortgages.
Aside from building personal credit, credit cards offer a few other advantages, like the perks and rewards that are offered by credit card companies.
These credit card perks and rewards vary widely. Here are a few of the ones that credit card companies commonly offer their cardholders:
Common credit card perks:
- Free travel insurance
- Free rental car insurance
- Extended warranties on approved purchases
Common credit card rewards:
- Cash back on purchases
- Frequent flyer miles
- Hotel loyalty points
Using credit cards the wrong way
It’s easy to get carried away with credit cards, but it’s better to spend responsibly.
It’s almost never a good idea to max out a credit card.
Every credit card comes with an Annual Percentage Rate (APR).
The card’s APR is the interest that the credit card company charges you for borrowing money.
Unless you pay off the entire balance on the credit card on time every month, the balance left on the card will draw interest and grow.
With credit cards, APRs usually include other fees, as well.
You might be tempted to use a credit card for a big purchase, but we recommend looking into personal loans first.
Personal loans generally offer lower APRs than credit cards, especially if you have good credit.
Dangers of debt
Credit card APRs are typically between 10 and 30 percent, and that interest adds up fast.
If you leave a balance on your card from month to month, that balance will draw interest, and you’ll have to pay the balance plus the interest back.
It’s very easy to build a lot of debt quickly. If you’re worried about going into debt with a credit card, the best bet is to stay away from them.
Professional credit reporting agencies keep track of your debt, and if the debt grows too high then it will prevent you from taking out other loans.
In some cases, unpaid credit card debt can result in legal action.
Using credit cards the right way
The first rule of using a credit card the right way is to only charge what you can repay, in full, every month.
If you keep your credit card balance at zero from month to month, then you can effectively build your credit while taking advantage of the card’s rewards and perks.
But doing so is easier said than done.
The credit card company will probably give you a minimum balance that you have to pay every month—but you should still pay off the full amount owed by the due date.
Even missing one credit card payment can affect your personal credit. It’s a good idea to set a monthly reminder to pay off the card, and some banks even allow automatic transfers to pay off credit card balances.
Finding the right credit card for you
When shopping for a credit card, it’s helpful to plan ahead. Why do you want the credit card? Are you trying to build credit? Do you want to build frequent flyer miles with your purchases?
Whatever the reason, make sure you sign up for a credit card that fits what you have in mind. Some cards have low APRs, while others have excellent bonuses and rewards.
Keep in mind that your personal credit and your personal income will play into which credit cards you can get. Some cards require really good credit and higher incomes, so it’s a good idea to do your research first.
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