Credit cards are often seen as the bogeyman of the financial world, often portrayed as detrimental to economic stability and integrity. Renowned financial advisor Dave Ramsey even recommends ditching credit cards altogether as the first step in his debt elimination plan, affirming a belief that American consumers are inherently irresponsible with credit card usage. However, I don’t completely concur with this viewpoint.
Mistakes can undoubtedly happen when managing credit cards. The biggest error is accumulating enormous debt that becomes impossible to repay. Individuals often sign up for cards with exorbitant interest rates, leading to significant financial mishaps later on. Similarly, some fail to understand the contractual terms before signing up which can lead to a confounding credit card situation.
There are instances where people are lured by a 0% introductory interest rate, only to be shocked when they’re retroactively charged interest for not paying off the balance in full before the offer expired. However, contrary to many warnings, credit cards hold numerous benefits if used appropriately and responsibly.
THE INITIAL ESSENTIAL RULE OF CREDIT CARD USAGE
The premier rule in using credit cards is that one must exhibit financial responsibility. If you’re grappling with massive consumer debt, it’s unlikely you possess the fiscal acumen to utilize credit cards to your advantage. However, falling into debt doesn’t automatically label someone as financially irresponsible, as sometimes we are thrust into debt through unforeseen circumstances like job loss, illness or student loan debt.
Interestingly, about 45% of Americans have credit scores above 750, indicating that being financially irresponsible isn’t as epidemic as it’s portrayed. If you’re financially mindful – not spending beyond your income, maintaining a substantial emergency fund, planning for retirement – owning a credit card shouldn’t pose a problem.
THE BENEFITS OF CREDIT CARDS
Contrary to negative portrayals in media, credit cards can be a beneficial financial tool when used with proper judgment.
BUILDING CREDIT HISTORY
Credit cards can be instrumental in creating a credit history. It’s evident from my personal experience when my husband and I began to merge our finances, and my credit score was significantly higher than his. About 15% of your credit score can be attributed to the length of your credit history, along with other factors such as payment history, amounts owed, new credit, and credit type.
I had my first credit card with a $500 limit at the age of 14, provided by my mother. This not only initiated my credit history but also instilled in me sound credit card usage principles.
BOOST YOUR CREDIT SCORE
In addition to setting up a strong credit history, credit cards can significantly boost your credit score. When making large purchases like a home or car, credit comes in handy. Owning a credit card demonstrates your financial dependability and ability to manage debt, making you an attractive prospect to creditors. If your credit background is a blank slate, you could potentially face sky-high interest rates when you eventually need to utilize credit.
THE APPROPRIATE WAY TO UTILIZE CREDIT CARDS
The ideal method for credit card usage is paying off your total balance every month. Every day, even better! Regularly clearing your balance prevents you from spending more than your maintained bank balance, hence avoiding unwelcome financial predicaments.
THE ADVANTAGES OF CREDIT CARDS
When dealing responsibly with credit card usage, one can capitalize on the benefits of credit card rewards. Thanks to my impeccable payment history and extensive credit history, I’ve saved thousands by using credit card rewards programs to fund holidays. Also, I don’t pay interest on these cards, so the rewards points practically amount to free money for using the card.
However, one should consider credit card rewards only if they’re confident about their discipline in managing credit cards. Getting lured by the rewards and recklessly overspending to acquire them is a dangerous territory that is best avoided unless you firmly trust your capacity to carry plastic responsibly.
Ultimately, credit cards can be a tool for financial discipline and responsibility. Just like anything – including chocolate, for instance – too much of it is harmful. But this shouldn’t necessitate complete abstinence. Instead, the goal should be learning how to manage its usage responsibly, indulging in it moderately. The solution isn’t complete eradication but disciplined use coupled with the right tools for correct utilization.
So, how do you use your credit cards responsibly?
