How Credit Cards Affect Your Overall Financial Picture

Credit CardsCredit cards, when used correctly, an be a valuable asset to your overall financial picture.  They can improve your credit score, leading to even higher credit limits and better interest rates, and you may earn cash back, air miles, hotel discounts, and other rewards.  However, failing to use them wisely can result in a much lower credit score, higher interest rates, and fewer options when you really need credit.  So, what are the best ways to use credit cards to your advantage?

Carry Fewer Credit Cards

Although it can be really tempting to apply for, and even carry, lots of credit cards, you really don’t need more than a couple of good credit cards.  And by good credit cards, we mean credit cards that carry the lowest interest rates, have reward options that you will actually benefit from, and that have no annual fees.  Of course, if you’re working to improve a damaged credit score, or if you have no credit, then you’ll have to start with a subprime card.  With subprime, it’s imperative that you review the terms!  Make sure you choose a starter card with the lowest interest rate and watch out for hidden fees!

Don’t Spend Carelessly

One of the biggest mistakes that people make with credit cards is spending recklessly.  We see something we think we just have to have, but then we don’t have the cash, so we use the credit card.  And that’s fine if you can pay the balance off when the bill comes.  But, nine times out of ten, we can’t, and that just makes you a little more short of cash until you get the new bill you’ve just created paid off.  If you’re not careful, you’ll end up having to use those credit cards to make ends meet when you’re over your budget because you’ve got several credit cards you’re paying on. A good rule of thumb I once heard regarding credit cards is this:  Buy it once, pay for it twice.

Of course, that doesn’t mean you should never use your credit card.  Keeping them “just for emergencies” or never using them doesn’t really help your payment history – just make sure you occasionally buy something, then pay it off when the bill comes in.  That is the best approach, by far.

Review Every Transaction

Pay attention to what you spend, where you spend it, and make sure you were actually the one who used your credit card!  If you’re close to your limit, log in to your account online and make sure you don’t go over your limit.  No one wants to pay those overlimit fees, trust me!

Pay Your Card Off Monthly

Pay your credit card bills off every month!  Save yourself the interest charges and keep your credit score on track!

Use Those Rewards

Personally, I like the cash back rewards.  I ALWAYS credit them to my account, although there are those who “save” them up all year and then have the credit card company send them a check.  And I have a friend whose husband uses his card to fly for work, and then they use the air miles for vacations.  Whatever works best for you – just don’t let those rewards go to waste!

Closing or Opening Accounts

Assuming you’re using your credit cards wisely and then paying them off each month, you probably won’t want to close the card out.  But, if you do decide to get a different credit card that better fits your lifestyle, or you close an account, be sure that you do so carefully.  Too many changes too fast can cause your credit score to drop more than just a few points.  It’s better to wait three, six, or even twelve month between opening or closing accounts so that your credit score has a chance to level out before the next change comes along.

Remember, credit cards are great financial tools, but if not used wisely, it’s really easy to get in way over your head!  And then, it can take years to pay off bills that you could have avoided creating just by thinking before you slid your card through the machine!