Credit cards are a double-edged sword. On one hand, they let you enjoy luxuries immediately, without having to save up, and they help you finance emergencies. On the other, they tempt you into easy spending, and you pay a steep price in interest charges. They’ll even hurt your credit rating over only one or two late payments.
There’s a right way and a wrong way to use credit cards, as I’ve discovered in years of carrying Visa and MasterCard. Use them wisely and they’re a great part of your overall financial plan. Abuse them and your finances will suffer. Here’s what you should know:
The right way: Consolidate your bills on your credit card and pay it off at the end of the month. You won’t pay any interest if you pay your entire bill by the due date. Your credit card is a great budgeting tool when used this way. I also carry rewards cards and rack up gift cards and cash by charging all my routine purchases, like groceries and gasoline.
The wrong way: Buy things you can’t afford to pay for up front. We live in an instant gratification society, and credit cards play right into that. Can’t afford that giant flat-screen TV? Sure you can if you use your credit card, and don’t think about those interest charges that will make it cost twice the original price. While an occasional indulgence is okay, it’s best to save up for big purchases. Once you have enough money in the bank, put that big ticket item on your credit card, then pay off the balance when the bill arrives. Now you’ve got a zero balance and have earned rewards.
The right way: Have a credit card that’s just for emergencies. Cars break down, appliances go on the fritz, and kids and pets get sick. I always keep a credit card with a zero balance for just such emergencies. Then, when I’m worrying about how I’ll get around while my car is in the shop, I don’t have the added concern of how I’ll pay the mechanic. When I have to use my emergency card, I make it a priority to pay off the balance as quickly as possible, even if that means cutting off Starbucks, movie rentals, and other frills for a while. I make a couple of non-emergency charges on this card each year to keep it active because some banks close your account if you don’t use it at least occasionally.
The wrong way: Never use credit cards at all. Never using credit cards is almost as bad as overuse in terms of your credit rating. Your credit score is based on many things, but the biggest factor is how promptly you pay your bills. If you don’t have any bills to pay, you won’t have enough history built up and banks and loan companies will turn down your applications. Get one or two credit cards even if you prefer paying cash for everything. Use them for small purchases a few times each year to beef up your credit score so it’s there in case you ever unexpectedly need it.