A credit card should work for you. When used correctly, they can provide significant financial benefits that other services cannot. Whether you’re inserting, swiping, or tapping, here are some strategies for using your credit card towards your long-term financial well-being.
1. Automate your credit payments
Let’s face it, we’re forgetful. And while forgetting to bring an appetizer to the neighborhood barbecue may be embarrassing, it’s forgivable. For credit card payments…not so much. Late credit payments can hurt your credit score, leave you with unnecessary fees, and trigger high interest rates (APR).
Setting your credit card payments on autopay can help ensure that you make your payments on time, every time. Automation takes the stress out of it and makes your life easier.
Just be sure to have enough cash in your linked checking account on your payment date to avoid returned payment fees from your credit card issuer or overdraft fees from your bank.
2. Pay in full every time
The biggest risk of a credit card is interest. Interest, or APR, is the cost you pay each year to borrow money, including fees, expressed as a percentage. It stands for annual percentage rate.
Credit card interest is the cost of borrowing money. You should never spend more on a credit card than you expect to have in your checking account at the end of the month. Racking up a large balance month over month can be hard to pay off. On the plus side, paying in full helps build your credit score. And building up your credit score can help towards big purchases like cars, homes, or loans. Paying off your balance in full each month also prevents you from having to pay interest.
3. Know the benefits
The more you know about your credit card, the more you’ll get out of it. Credit cards can offer incredible benefits, rewards, services, and exclusive experiences.
Some cards offer benefits like car rental insurance or global entry, an expedited travel screening process.
Cash back rewards programs refund cardholders a percentage of the amount spent. Some rewards programs are specific to brands, travel, and food. In these cases, it’s helpful to note what percent and where your card offers cashback. If your card gives cash back at specific brands or industries, use your card there.
But not all cards are exclusive to one category of business. For example, the Owner’s Rewards Card gives up to 10% cash back at select brands in your portfolio—with brands varied across several industries.
Other services include zero liability on unauthorized purchases. If fraudulent purchases are made on your debit card, the money is gone until you settle it with your bank. For credit cards, money is not exchanged until after you settle it with the lender. And for credit cards with zero liability, you are not held liable for any fraudulent purchases made.
4. Use the grace period
When you make a purchase using your debit card, your money is immediately taken out of your checking account. When you purchase using a credit card, your money remains in your account until you pay your credit card bill.
This extra time or grace period can be helpful in two ways:
- First, you allow your money to sit in your checking account by delaying the payment until the end of the month. If it’s an interest-bearing checking account, you will earn money during this grace period—however infinitesimal. Eventually, it’ll add up.
- Second, if you are spending responsibly and know your checking account will have the appropriate funds at the end of the month, you don’t have to watch your bank account as closely.
5. Build credit
When used responsibly, credit cards can be a great way to help you build credit. Credit card companies report your payment activity to credit bureaus which then give you a credit score.
Credit scores are based on your payment history (whether you pay on time) and credit utilization (the balance you owe relative to your credit limit). Having a good credit score is extremely important and can be the make-or-break detail that determines whether you will get approval on things like mortgages, loans, or insurance. A poor credit score can make it challenging to get approved and can lead to high interest rates.
According to the Fico credit scoring model, credit scores fall into these five categories:
- Poor credit: 300-579
- Fair credit: 580-669
- Good credit: 670-739
- Very good credit: 740-799
- Excellent credit: 800-850
The three main benefits of having good credit are:
1. Easier credit approval
If you have good credit, your credit applications are more likely to be approved. This means that when you apply for credit cards, loans, or mortgages, you are more likely to hear back in time and be accepted.
2. Lower interest rates
In addition to higher approval rates, good credit can also offer you lower interest rates. Paying less interest on borrow can save you a lot of money over time.
3. Better loan terms
The terms of your loan are usually better if you have good credit. You may receive a high credit limit on a credit card or other advantages like low fixed-rate mortgages.
Bottom line (of credit)
Automating your credit payments, paying in full every time, knowing your benefits, using the grace period, and building credit are all ways to use your credit card responsibly. The bottom line is when credit cards are used responsibly, they can be a fantastic way to build towards your dream future.