Credit cards are incredibly common in the wallets of Americans in every state. We get started young: a bank will join a bank fair on a college campus and convince you to sign up for a student credit card; in return you get a spiffy new t-shirt! The credit problems start there and continue on for years or decades for some individuals.

Not all credit card use is bad. I’m a firm believer that a credit card is a tool. Just like any other tool it can be used for good or for bad. How it is used is more important than if it is used. If you use credit cards responsibly over your lifetime you could rack up hundreds of thousands if not millions of reward points or reward miles… or even just plain ole cash back.

What Your Credit Card Spending Says About You

Everyone uses a credit card in different ways, but there are four main buckets that most people can be dropped into. How you use your credit card says a lot about you and your mentality toward credit cards. Which mentality fits you?

If You Carry a Balance…

…your spending says, “I can’t afford to pay for the things I own.”

Carrying a balance is essentially saying I wanted this item, I didn’t have the money on hand to be able to purchase it outright, so I decided it would be better to borrow money, go into debt, and pay interest on the balance until I could find the money to pay it off.

It’s a foolish way to handle a credit card unless you are in an emergency. If I told you that $100 item would end up costing you $150 total, would you think it was as good of a deal? Absolutely not. But we trick ourselves with the need for immediate gratification and not understanding the math behind how much the purchase will end up costing us in the end.

What’s worse is it usually isn’t just one item that goes on the credit card. You end up financing a big portion of your life and the minimum balance amount continues to creep up higher and higher. Before you know it you are thousands of dollars in debt and it will take years to fix the problem.

If You Pay Off Your Balance Each Month…

…your spending says, “I see credit as a tool.”

Using a credit card isn’t a bad thing. Carrying a balance is a bad thing. If you pay off your statement balance every single month then using a credit card has no negative impact on your financial situation. (Although some argue that those who use credit spend more money; this can be avoided by sticking to a budget or spending plan.)

By paying off the balance at the end of every month you are treating your credit card like a debit card. The similarities are amazing: both cards are made of plastic, both have a magnetic strip, and both are in one way or another connected back to your bank account. By swiping your card and paying off the charge before you pay interest you are essentially using the card as a debit card. The benefit of this is you can also earn cash back, reward miles, reward points, and other benefits like warranty extensions and fraud protection just for using the credit card.

If You Keep a Credit Card for Emergencies Only…

…your spending says, “I’ve been burned and I know better” or “I’m scared.”

And that’s okay. Maybe you used credit cards in the past and they got the better of you. Your eyes were bigger than your stomach. You bought things you couldn’t afford, and things spiraled out of control with late fees, high interest rates, and months to pay off a single charge.

That’s okay. It is much, much, much better to avoid using credit cards completely than to use them even sparingly if you know you can’t handle the responsibility.

Some people that have been burned by credit card debt will keep the credit card account open because it helps your credit score. That’s fine, and some of these folks even freeze the credit card in a block of ice in the freezer to keep themselves from using it a spending spree. Others simply keep the account open but cut up the card. (However, it is better to keep the card and use it for a charge every month or two to keep the account active. If your account has no activity for a long period of time — around 12 months — the bank may close the account.)

There is one problem with keeping a credit card for emergencies: those emergencies suddenly become very expensive if you carry the balance to the next month. If you need to put the charge on the card and pay it off in two weeks before you are charged any interest, that’s fine. But it needs to be a significant emergency for you to swipe that card today and pay off the balance in several months. You will pay a ton of interest in between if you take this path.

If You Rack Up as Many Points or Miles as Possible…

…your spending says, “I’m not afraid and want to maximize the benefit of my spending.”

I’m right there with you. This mentality first relies on you using your credit card like a debit card mentioned above. If you carry a balance in the pursuit of airline miles, hotel points, and cash back then you are playing a losing game. The interest you pay will easily wipe out most, if not all, of your credit card rewards.

If you are not paying any interest, then every responsible swipe of your card results in some sort of extra benefit. Maybe you are building up to a dream European vacation and want to fly first class for free. Or maybe you simply want to get 1%, 2%, or 5% back in cash on every dollar you spend.

Whatever your preference is responsible credit card use can get you there. Avoid the fees along the way and thank your credit card company for giving you a little extra something for spending money you would have spent regardless. It’s a win-win in my opinion.

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