Understanding How to Use a Credit Card Responsibly Can Increase Your Credit Score!
The Ideal: Pay Your Credit Card Balance Each Month in Full and On Time
At its core a credit card is simply a means of borrowing money. It’s also important to understand that a credit card is an exceptionally lousy means of borrowing money if you carry a balance.
Thus any credit card strategy in that doesn’t also involve paying off your balance in full and on time each month is, at best, of limited value and, at worst, downright stupid. In short, how to use a credit card effectively entails you pay off your credit card balance each month then you can reap significant benefits from making purchases with a credit card. However, if you consistently carry a balance from month to month then your credit card issuer is the one reaping the benefits (at your expense!).
For example, let’s say that you need to buy a plane ticket that costs $1,000. You have both a credit card and $1,000 in the bank that you could use to make the purchase. Should you pay in cash or use your credit card? If you use the cash then you can purchase the ticket outright without incurring any credit card debt. Of course that’s good, but if you purchase the same $1,000 ticket with a credit card then you could automatically receive accidental death and dismemberment (“AD&D”) insurance for the flight as well as 1,000 bonus points or flight miles. Further, when your credit card statement comes the next month you can use the $1,000 you have in the bank to pay it off in full. So either way you’ll end up with no credit card debt, but if you pay in cash you’ll get no special benefits whereas if you pay with a credit card you’ll get valuable insurance for the flight with credit card bonus points to boot.
Second Prize: Make Purchases With a Credit Card as Long as You are Able to Steadily Reduce Your Debt
While it would of course be great to have your credit card fully paid off, what if you’re not in a position to do that right now? Does that mean that you should lock your credit card away and only pay for things in cash until it’s fully paid off? Not necessarily, because you can still benefit from making purchases with a credit card as long as you’re disciplined enough to continue to make meaningful progress towards paying down your credit card debt. Understanding how to use a credit card effectively may vary from situation to situation.
Danger: How To Use A Credit Card Negatively By Using Rewards & Points as an Excuse to Pile on Unsustainable Debt
While it’s true that paying by credit card offers some unique advantages that paying with a check, a debit card or cash does not, I want to again emphasize that you should never use the benefits you receive from paying with a credit card as a means to rationalize making purchases you can’t afford. For example, don’t talk yourself into buying a $1,000 plane ticket you can’t afford just because you’re going to get a few credit card bonus points or flight miles. If you choose to go down that road then it won’t take long before the deadly math behind credit card interest threatens to make financial bondage your destination. The Fidelity credit card has one of my favorite reward programs.
Summary: Credit Cards are Great Financial Tools if Used Correctly
There’s a myth among some that only those who are irresponsible, addicted to spending, or deeply in debt use credit cards on a regular basis. While there are some who do indeed fall into one or more of those categories, it’s also true that those who understand the benefits of making purchases with credit cards and pay off their balances each month use credit cards to make practically every purchase they can.