Getting that first credit card can be very exciting. You finally have credit and you can use that credit however you wish. That card is also the first step toward building enough credit to be able to buy a car, home, and a number of other high priced items that you may need in the future. But in order to reach these goals, you need to know the right and wrong ways to use credit cards.
Those cardholders that use credit cards the wrong way may find themselves using one credit card to pay the payment of another. Chasing credit card payments in this way does not pay off balances due to payments simply being ping ponged back and forth. If a person is “ping ponging,” that is an indication that there is a problem and it is one that will need to be fixed since available credit limits do not last a very long time and interest rates can go up if payments are not made on time.
The Wrong Ways
Knowing the wrong ways to use credit cards is just as important as knowing the right ways. Here is a list of things that you should not do when you have credit cards in your wallet:
- Don’t use credit as a reason to buy things you would normally not be able to buy with cash. You must ask yourself, “can I pay this item off when my credit card statement comes?” If you can, then you can afford it. If you can’t, it is important to make it a goal to pay as much as possible toward the credit card balance and try and stretch payments out for no more than three months.
- Try to avoid cards with annual fees unless the fee is one that belongs to a prominent awards card. There are membership-type cards that have annual fees, otherwise you are going to see a great deal of your balance consumed by a fee that you may not be able to pay back in a lump sum in order to avoid paying interest on it.
- When applying for a card, don’t let the introductory APR fool you into believing the card may be a great one. There are good cards with great introductory rates, but it is the APR after the introductory period that you should look at or you will find that just paying the minimum payment on your card each month will barely move your credit card balance.
- Do not max out a card as soon as you get it. Yes, you really want that big screen TV, but maxing out your credit card is going to hurt you more than help you and could lead to you opening more credit card accounts so that you have available credit to work with.
- Avoid late payments at all costs because late payments can increase the APR, which causes your credit to cost you more. Late payments can also negatively impact your credit report and it can be difficult to repair the damage that negative marks cause.
- Never use one credit card to make the payment of another. If anything, perform a balance transfer to a card with a competitive APR and make the payments with your actual income and not another card. This type of “floating payments” is a practice that leads individuals into bankruptcy.
- Opening a credit account every time you are asked can hurt you more than help you. Store credit cards are especially expensive and really not recommended since you can use your regular credit card to make the same purchases at a much lower APR. Opening accounts just because you can may hurt your credit because of too many open accounts.
It is okay to have two or three credit cards, but the focus should be on credit building and maintenance rather than having “extra money” to spend. And while it can be easy to become anxious about establishing credit, making it seem like a good idea to apply for any credit card that will give a person a chance, these cards can be expensive. It is best to shop around for the best deal in order to get the best start. It is also important to not apply for every card that is encountered because inquiries on a credit report can reflect negatively on a credit rating.
The Right Ways
When using credit cards the right way, you can build a solid credit history that will enable you to move forward toward bigger and better things. The right way also means not getting into extreme debt. Here’s how you should use your credit cards:
- If you are able to, pay your balance in full. Paying your balance in full means avoiding finance charges. This also looks great on your credit report because you are not using all of your available credit.
- Use your credit card only for transactions that you can afford. For instance, you may use your credit card for gas and then pay that amount off before your due date. Smaller transactions like this will enable you to create a strong credit history that could lead to credit line increases.
- You can request credit line increases, although the intention of these increases should not be so you can make a large purchase or create more spending room on a maxed out card. The reason for the credit line increase should be to give yourself more available credit and use as little of it as possible. This, combined with on-time payments, will better your credit score even more.
- If the credit card is a rewards card, it is okay to use the card frequently to obtain rewards. The idea, however, is to pay off the balance so you can avoid finance charges. Not only are you making purchases with the card that you could afford without it, but you are gaining rewards in the process for practically no cost.
- It is okay to use a credit card in an emergency because it is good to have access to funds when you may be running short in the wallet.
- If the credit card has a program that you can enroll in that will give you payment protection if you would lose your job or enter into another type of financial hardship, it may be worth taking. Such programs will protect you from receiving negative marks on your credit report if a financial issue or even a health issue causes you to be unable to make your payments. Only you know if such a program is right for you.
- Making sure joint accounts are only between you and a responsible adult. Allowing a child to have their name on the account or giving them a card that can be used on the account if they need it for “emergencies” can be quite risky. If your child must have a card, then a prepaid credit card is best for them, as you are able to fund it yourself with a set amount of cash. If there is an emergency, many prepaid cards can be reloaded online instantly or through a local retail location.
When you are responsible with your credit cards, there are great rewards to be had. You may be able to later obtain a personal loan if you need it, a car loan so that you have a better vehicle, and one day you can buy a home for you and your family. Irresponsibly using credit cards can delay these important events, so it is important to resolve oneself to the fact that a credit card is something that requires a serious amount of care from the moment the credit card application is filled out and submitted.