Credit cards get a bad rap. Sure, they can certainly be dangerous in the hands of a personal with no sense of fiscal responsibility, but the truth of the matter is that credit cards can really help someone looking to establish themselves financially. The credit card is a critical tool in any responsible consumer’s financial arsenal. The key to using a credit card wisely is in understanding its strengths and weaknesses.
But sometimes it’s hard to understand the value of a credit card when you only hear horror stories of people who racked up huge sums of debt in a short period of time. These stories are few and far between, and can be prevented if you treat the power to purchase with seriousness and responsibility. Consider these tips and arguments for using a credit card wisely.
Credit card training wheels
When you first get a credit card, I advocate for testing it out with very small and infrequent purchases—in other words, you should put “training wheels” on your credit card until you get the feel for how it works. Training wheels purchases on a credit card could take many forms: trips to the grocery store, payments at the gas pump, or subscription fees to various online services and publications. The point of using your credit card for these smaller purchases is to get you to slowly build your credit, amassing small monthly balances that you can easily pay off without getting in over your head.
Use this initial phase as a time to assess whether or not you like the idea of using a credit card for your purchases. Some people have a hard time grasping the simple concept behind credit cards, and they end up treating them like they’re sources of endless free money. By restricting your purchases to fewer and cheaper items, you’ll develop a sense of financial discipline early on.
Build credit for better insurance rates
Responsible credit card usage is critical to expanding your financial horizons. It means paying a good chunk of your monthly balance on time, avoiding splurge purchases on pricy items, and keeping track of your purchases so you know exactly where you stand at any time financially. The most prominent advantage to using a credit card responsibly is that it builds your credit, earning the trust of banks and lenders so you can do things like take out a loan for a house or consider a new car purchase.
One of the best parts of building a solid, positive credit history is that it allows you access to more affordable insurance rates for all types of plans. Rates and plans for car insurance, home insurance, and even life insurance can fluctuate greatly depending on your credit history. Someone with a shaky credit history and a problematic financial past might have much more trouble finding an affordable insurance plan than would someone with a more respectable credit history. If you use your credit card wisely, you’ll go a long way towards developing a strong credit history.
Know the card’s limits and yours
Credit cards can be a great help to a person that needs a financial safety net for worst case scenarios, or for a person gradually building their credit history. But some people just can’t get over the basic concept of the credit card, and they continue to get into trouble with them. If you figure out early on that you can’t get a handle on your payments—if your statements get bigger and bigger with each passing month, if you start opening one credit card to pay off another—then you should stop using them. It’s up to you to be financially responsible with your credit card, so be wary of how you use it!
About the Author: Susan is a freelance blogger who enjoys writing about automotive and health news, technology, lifestyle and personal finance.