Using a Credit Card
One of the greatest rappers of all time, Sean ‘Jay-Z’ Carter, once said “You know what’s more important than throwing away money at a strip club? Credit.” Credit is arguably one of the most important terms in finance, yet it is still the most overlooked. Credit gives you the ability to obtain goods or services before payment, based on the trust that you will pay for it in the future. Credit cards are one of the quickest and easiest ways to establish credit. That is, however, if they are used responsibly.
By definition, a credit card is a card issued by a bank or business that gives you the option to purchase goods and services on credit, with a promise that the funds will be paid back at a future date. There are two keywords to pay attention to here: option, and promise. You do not HAVE to use your credit card, but if you do, you are making a promise to pay back the money you owe.
Below are some quick helpful tips on how to effectively manage a credit card, especially if you are a first time user.
Tip #1: Compare, Compare, and Compare
It is always best to evaluate all options and shop around before making a final decision. Think about what you do when you are about to purchase a new phone. You have an idea of all the different types of phones you will only consider, and you already know the multiple stores that are selling these phones. So, what do you do? You shop around, and see which store is offering the best deal and which phone has the best features. The same principle applies when selecting the right credit card; you want to select a card that has the best perks and gives you the most bang for your buck. Key things you would want to evaluate are annual fees, late fees, interest rates, reward points, and other terms and conditions related to the credit card.
Tip #2: Keep Your Balance Clear
You want to ensure your credit card balance is always paid off as soon as you can. Ideally, when you are making a credit card purchase, it is best to already have the funds available to cover the purchase or be certain those funds will be available to you before the billing date. By following this strategy, you will develop a credit history that shows you actively pay your bills on time, and in full. Also, if you keep a running balance on your card, you can be prone to be charged interest fees (an additional fee you have to pay for not keeping your balance clear). Let’s go back to the phone example. Assume you are preparing to purchase an $800 smartphone. If you already have the $800 saved up, congrats! You can just swipe your credit card and pay off the balance as soon as it is posted to your account. Or, if you have $400 saved aside, and you know another $400 in savings will come in next week, you can still make the purchase, because you will soon have enough funds to cover it.
Tip #3: Don’t Overuse the Card
This is where most people say having a credit card can be a blessing and a curse. Since the card is right at your disposal, it can be easy and tempting to swipe away for every purchase. If not doing so responsibly, though, it can come back to haunt you. You may end up spending more money than you actually have, or even max out your card, which is how most people end up in debt. Most advisors suggest not spending more than 30% of your credit limit. For example, if your credit limit is $500, you should not spend more than $150 at a given time, although circumstances do vary. In time, this will show that you are a savvy spender, which will increase your credit score and even increase your credit limit (which allows you to buy more with your card). Other optional methods include using the card for specific purposes such as emergencies. Or, if you live in a city that requires you to use public transportation, you can use your credit card solely for transportation expenses. The main takeaway, regardless of which option you choose, is to make sure your balances are paid off by its due date and to NEVER miss a payment, as missing a payment will negatively impact your credit score.
Tip #4: Protect Yourself
Cybersecurity is potentially one of the most important topics facing any consumer, and with the continual advancements in technology, there seems to be an increase in credit card scams and identity theft as well. The best way to manage this is to always protect and secure your information. For example, most credit card companies give you the option to receive your statements online instead of through the traditional mail route. This is ideal for most people because it eliminates the risk of having your paper statements stolen or delivered to the wrong address. Also, most credit card companies charge for paper statements, so receiving them online may be your best bet. You should also avoid using your credit card at locations that are vulnerable to cyberattacks or other scams such as bodegas or gas stations, as those places are high in identity theft occurrences and false charges.
In summation, credit cards, when used properly, can be very beneficial and help secure your financial future. When credit cards are used responsibly, it can greatly boost your credit score. With a high credit score, you will be able to greatly benefit from lower interest rates, and avoid premiums on certain purchases like your dream car or dream house. Even when applying for a job or shopping for new insurance, almost all companies will run your credit score, so make sure it is always in check!
For any additional questions, please do not hesitate to reach out.
Source: https://www.investopedia.com/terms/c/creditcard.asp
Written by: Kagame Li-A-Ping