Credit cards can serve many useful purposes. If you know how to use them correctly, they can add purchasing power to your monthly budget as well as being a way to build credit, earn rewards, and much more.
Using your credit card in smart ways today means you'll be in great financial shape for years to come. Read on to make sure you're getting the most out of your credit card.
1. Understand How Interest Works
In order to use your credit card the smart way, you should understand how interest rates work. There are a few key points to keep in mind when it comes to interest rates on credit cards.
Your Credit Score Matters
Interest rates will vary depending on your credit score. Credit cards often advertise an "as low as" interest rate that will apply to you if you have a great credit score. If your credit isn't so great, you'll likely get a higher interest rate until your score improves.
Watch the Interest!
The interest you pay is based on your balance at the end of each statement period. So if you make a purchase and pay it off within that same statement period, you won't pay any interest. Keeping a low balance is the key to avoiding excessive interest.
The interest rate is the daily charge on your balance based on the Annual Percentage Rate (APR), which is the yearly rate to borrow money. Unlike other loans, there is no difference between interest rate and APR with credit cards.
2. Use Your Credit Card to Build Credit
If you're just starting on your financial journey or need to get back on track, a smart way to use your credit card is for building or repairing credit.
A credit card is an easy way to get yourself on the map if you don't have much financial history yet. To build credit, take out a low-interest credit card and make a few small purchases every month.
Be sure to pay it off in full each month, or spread the repayments over a short period, to maintain a good credit history. You should pay more than the minimum suggested payment and keep a good debt-to-credit ratio. This means using less than 30% of your available balance.
A credit card can also be a good way to repair credit if you've had some delinquent payments in the past. You might need to get a secured card at the beginning, meaning you make a cash deposit that your credit union keeps as collateral against your purchases.
Once you've proven your creditworthiness, you'll be able to access your cash deposit and get an unsecured card at a lower interest rate.
3. Earn Cashback Rewards on Your Purchases
The amount of cashback you get will depend on your credit card. You might get a fixed percentage of your purchase amount back, or you might get a fixed amount of cash for a certain amount of dollars spent.
The cashback might be credited to your balance (monthly or annually) or deposited in your checking or savings account. It might be credited monthly or annually.
4. Use Your Credit Card for Fraud Protection
Nowadays, debit cards can function like credit cards so you may be tempted to stop using your credit card for common purchases. But did you know that credit cards offer much greater protection from fraud?
If you notice suspicious activity on your credit card, you can simply call your issuer and they should be able to organize quick compensation. But if your debit card is compromised, a fraudster could take all the cash out of your account and the funds in any linked accounts, too.
5. Keep Your Available Balance for Emergencies
Another one of the smart ways to use a credit card is for managing your household finances. When it comes to family life, who knows when an appliance will stop working, your car will break down, or you'll have extra health care deductibles?
Unforeseen expenses can crop up at any time. But if you reserve your available credit card balance for such moments, you and your family will always be covered.
6. Use a Low-Interest Card to Pay Down High-Interest Debt
Using your credit card to make unlimited purchases is indeed a fast way to accrue debt. But there are also smart ways to use a credit card that can help you manage your debt.
Many credit cards offer a low-interest introductory period and a no-fee balance transfer. So if you have a large balance on a high-interest credit card, you could shop around for a card with a better interest rate.
To maximize benefits, try to pay the balance down before the low-interest introductory period on the new card expires.
Use Your Credit Card the Smart Way
Now that you're up to speed with all the smart ways to use a credit card, you might be thinking about getting one for the first time or switching to one that offers better rates and rewards.
Your local credit union is a great source of financial products and services to suit every lifestyle and budget. Click below to find out more!