By the time most people reach adulthood, they undoubtedly have some level of familiarity with credit cards. Whether it’s a horror story of someone racking up thousands of dollars of credit card debt or the handful of card offers you receive in the mail on a weekly basis, they’re an integral part of the world’s financial fabric.
While these small pieces of plastic might be everywhere, not everyone understands exactly how they work. More importantly, it’s essential to learn how they can benefit you financially.
The first thing to understand about credit cards is how they differ from debit cards. When you use a debit card, you’re paying for items by drawing funds directly from your bank account. Prepaid debit cards are similar, except you’re using a set amount of money you’ve preloaded to the card.
Meanwhile, credit cards are essentially miniature loans. When a bank gives you a credit card, it’s giving you access to a set amount of money it’s willing to lend you every month. This is your credit limit. You either repay the bank the full amount you borrowed, or you end up owing interest on any remaining balance at the end of the month.
How Credit Cards Can Make or Break Your Financial Reputation
On the surface, debit cards appeal to people who struggle with budgeting — it’s theoretically impossible to spend more money than you have as long as you’re drawing directly from your bank account. With a credit card, it’s easier for people to get themselves into trouble by buying a bunch of items and then struggling to pay down the balance. Used responsibly, there are several ways credit cards can benefit you financially.
1. Credit-Building Opportunities
If you ever plan to buy a house, a car, or any other major item that requires a loan, you’ll need a strong credit score to get a good deal. Lenders see a higher credit score and respond with lower interest rates or increased equity. Regularly using your credit card and paying off debt is a great way to boost your credit score. A good credit score can also save you money on insurance or help you lease an apartment because it proves you’re a responsible borrower.
2. Rewards Programs
Many credit cards offer rewards programs that provide you with cash incentives or other perks for using your card. You can make smaller purchases such as groceries or gas using your credit card, then pay off the debt monthly to rack up rewards. Most debit and prepaid cards don’t offer similar benefits, and they sometimes even charge hidden fees on transactions.
3. Expense Tracking
Credit cards make it easy for you to create a budget and see where your money is going each month. Some credit card companies, such as American Express, itemize customer purchases and create detailed reports about monthly spending habits. Rather than pay extra money for detailed spending reports, let your credit card company handle it for you.
Identity theft is no joke. A recent study reports fraudsters stole $16.8 billion from U.S. consumers in 2017. Thankfully, most credit card companies offer zero liability protection. This safeguard protects cardholders from having to pay for purchases they didn’t make. This extra layer of security allows you to spot suspicious behavior before any money is withdrawn from your bank account.
5. Purchase Protection
Let’s say you just bought a new flat-screen TV from your favorite retailer. After driving home and hooking it up, you discover it has a bunch of dead pixels. You didn’t pay extra for the store’s extended warranty, and it feels like you might have to simply make do. Provided you made the purchase using a credit card, these defects are likely covered under your card’s automatic purchase protection.
This is particularly helpful with big-ticket items, as it supplies insurance against malfunctions, accidental damage, or theft for a limited period. Be sure to check out the details of your card’s protection policy to know your coverage limits, as well as how long your purchases are protected.
6. Emergency Money
Sooner or later, an emergency will inevitably arise. Whether it’s an unexpected hospital visit or a lack of funds to pay for your children’s holiday gifts, credit cards can offer another way to handle the curveballs life throws your way. Be mindful that you’ll have to pay interest on any balance you carry over between months, but credit cards can be useful tools for getting out of sticky situations.
Tips for Becoming a Credit Card Master
Credit cards offer numerous benefits, but it’s important to use them wisely. The best way to ensure your credit card is helping — rather than hurting — your score is to pay your bill on time and in full every month. If you can’t make a payment, call your creditor and explain the situation — providers will sometimes waive late fees in extenuating circumstances.
Control your debt by keeping your balance below 30 percent of your available credit. You should routinely check your interest rate against competitors’ to see whether you can get a lower rate elsewhere. Small cost-cutting measures can quickly add up to save you a lot of money.
To improve your credit score, avoid closing old accounts until you know the impact doing so will have on your score. Your credit score factors in numerous things, including the average age of your accounts. Even if you rarely use a card you’ve had for 10 years, closing that account could cause your score to drop a few points.
At the same time, space out your credit applications so they’re at least six months apart. Frequent applications — and the hard credit inquiries that traditionally accompany them — can quickly hurt even the most promising credit score.
Finally, keep close track of your credit card activity. Most lenders offer online portals to monitor spending activity in real time. In addition to keeping your spending in check, this frequent attention will help you spot any instances of fraud.
Credit might be confusing, but CreditSoup is here to help. Whether you’re curious about your free credit score or looking for a credit card that matches your needs, our useful tools can help you save money and understand personal finance.
Editorial Disclaimer: Information in these articles is brought to you by CreditSoup. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles. The information is accurate to the best of our knowledge when posted; however, all credit card information is presented without warranty. Please check the issuer’s website for the most current information.