Credit Cards…. are they good or are they sheer trouble? Credit cards have such a negative connotation in the minds of most individuals and are looked at as a terrible source of funds. Credit cards (LIKE ANYTHING ELSE) if not used properly can have a negative impact on your life and could bring you financial stress. However, if they are used responsibly they can be great tools for building credit, earning rewards, and protecting yourself from fraud.
So now that we have an unbiased view on credit cards lets address the question. What is the best way to use a credit card?
- Use a Credit Card to build your credit score. Using credit cards (responsibly) can be a great way to improve your credit score. Make sure to keep your utilization below 30% on all your credit cards (balance used/available balance=utilization) and to pay at least your minimum balance every month. I recommend paying off your total credit card balance at the end of each period to avoid paying additional interest and this will still show responsibility to the credit bureaus.
- Use Credit Cards for the FREE MONEY and limitless rewards! Credit companies offer some amazing rewards for using their cards and it’s up to you to take advantage. Here’s my philosophy, if you’re going to spend the money anyway…why not get rewarded for it. Example, one of my cards had a promotion where if I spend $1000 in 3 months or less I get a $300 cash back reward. I’m going to spend the $1000 regardless on my bills so why not use my credit card instead of cash and pay the balance at the end of the month? I just got a $300 return on an investment of $0 (I was spending the money regardless) that is an infinite ROI! Caveat: these credit card companies are not foolish in promotions like this. For every person taking advantage like me, there is someone else getting taken advantage off because they don’t end up paying it down and get hit with ridiculous interest rates and credit companies make their money back hand over foot).
- Fraud Protection. Credit cards give the best fraud protection over any other spending method out. Credit are regulated under the Fair Credit Billing Act (Regulation Z) where the most you can be held liable for a fraudulent transaction is $50. On top of that most credit cards offer a $0 liability clause where they voluntarily agree to cover all fraudulent charges made on the card. Debit cards don’t follow these regulations and can be an extreme hassle to get money back if fraud takes place.
- Balance Transfer. For those of you with existing credit card balances with high interest rates, credit card can even help you get out of credit card debt faster! 0% APR balance transfer cards allow you to transfer high interest credit card debt to this new card and have 0% interest for up to 18 months. This can really help you get out of debt faster because you won’t be paying any interest on the existing balances. Who would of thought that the answer to getting out of Credit Card debt could be another Credit Card! Caveat: This method is very strategic and takes DISCIPLINE! If not disciplined an individual will roll the old debt to the 0% APR card, then max out the old card again. If you question your discipline I recommend cutting up the old card or not using this method.
In conclusion, Credit cards can be amazing for building credit, obtaining free money and rewards, Fraud protection, and helping get out of debt. However, if used irresponsibly they can be terrible and cause people to live beyond their means and cause tremendous stress. So really the question is, are you a good fit for a credit card???…that is a question only you can answer.