Credit cards have good qualities as well as bad qualities. For instance, they can help increase your credit score when used correctly, but they also come with interest rates that are much higher than other types of loans. What should you know about credit cards before you apply for them?
Establish or Increase Your Credit Score
Paying your credit card balance in full each month helps establish or increase your credit score. This is typically true regardless of your current credit situation. If you can’t make the full payment each month, strive to keep a balance that is less than 30 percent of your available credit line. Making timely payments is important because it is 35 percent of your overall score.
Get Rewards Points and Other Useful Perks
Most credit card companies offer a variety of perks to entice you to use their cards. You may be able to get 5 percent off at retailers during the Christmas holiday or 2 percent off dinner at a local chain restaurant. Points may also be offered for airline miles, hotel rooms or rental cars to make your next vacation a little less expensive.
Have Funds Available in Emergency Situations
If you find yourself stranded without cash or access to an ATM, a credit card can come in handy. It will help to pay for a hotel room for the night or emergency repairs to your vehicle. It can also help to pay for a rental car or a flight home if necessary.
Credit Cards Come With High Interest Rates
Not being able to pay your credit card debt in full each month can result in finance charges. In some cases, this could mean paying hundreds or thousands in interest to your lender each month or throughout the course of a year. It may become necessary to file for bankruptcy or pursue a debt settlement to pay your existing balance if it gets too high. The average credit card interest rate is around 15 percent and can be as high as 29.99 percent.
Relying on Credit Cards Can Lead to Bad Habits
If you rely too much on credit cards, it could cause you to develop poor spending habits that could lead to bankruptcy or other negative outcomes. It is important to remember that accruing too much debt may result in not being able to save for retirement or take a vacation. It could also result in not being able to leave a job or go back to school because you might not be able to afford to.
Relying on credit cards may result in spending above your means and not developing the fiscal discipline needed to manage your money. Ideally, you will create a budget that helps show you where your money comes from and where it goes on a monthly or quarterly basis. If you have already accrued credit card debt that needs to be repaid, a budget can show you opportunities to cut costs to pay down the balance faster.
Having and using a credit card is something that you should take seriously. If you don’t think that you can resist using it for unnecessary purchases, it may be best to stick to using cash or a prepaid card to limit your spending.
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