How To Use Credit Cards Wisely

Use Credit Cards Wisely

I can’t tell you how many financial gurus promote avoiding credit cards, then go on to run down a list of all the wrongs of using such cards.

Don’t get me wrong, I do agree, in part, with these methods. However, I also understand that there are ways to use credit cards wisely to build credit and meet your long-term financial goals.

So, below I’ll discuss how to use credit cards wisely.

Use Credit Cards For Emergencies Only

Emergency Only

Let’s face it; it can take some time to build an emergency fund covering 6-8 months of living expenses. In the meantime, life happens, and sometimes an emergency comes up that simply can’t wait another five months for you to build your emergency fund.

In that case, you may, at some point, need to use your credit card for an emergency expense. A credit card may need to be used to cover the expense in an actual emergency such as a medical emergency, car repairs, a major home appliance breaks down, etc.

Though I would certainly call these true emergencies, I would also advise proactively anticipating these types of emergencies and continuing to work toward building an emergency fund to avoid using debt to cover emergency expenses.

Pay Credit Card Balances in Full Each Month

Pay Credit Card Balance Each Month

Another way to use credit cards wisely is to pay your balance in full each month. Credit cards become an issue when mismanaged. One effective way to avoid mismanagement is not to build up balances. 

Not only does paying your balance in full each month help manage credit card debt, but it can also help to build a positive credit history by keeping your credit utilization rate low. 

Paying balances in full, or even paying them down significantly, decreases your credit utilization rate, meaning you’re using less of your available credit. By doing so, lenders are more likely to “trust” you and be more willing to issue new credit when needed.

Also, paying balances in full each month can help keep you out of debt and help you take advantage of credit rewards programs. 

Build Credit Using Credit Cards

Build Credit Using Credit Cards

Speaking of building positive credit history, another example of using credit cards wisely is to help build credit. While not the only way to build credit as a young adult, getting a credit card, and paying it off on time every month, shows you are a reliable customer, which can help improve your credit score.

Building credit is about more than just applying for more and more credit. It’s about how you use that credit once you have access to it. When looking for ways to build credit, it’s important to have a plan.

For example, let’s say your goal is to simply build credit to have more buying power for large purchases. In that case, using your credit card to pay for some monthly expenses, and paying the card off at the end of the month, can prove to creditors that you can responsibly handle making monthly payments.

Now, that said, having too many credit cards has the potential to do the OPPOSITE of building credit. For example, every time you apply for a credit card, you get an inquiry on your credit report. Too many inquiries can drive down your score. 

Also, you should pay close attention to how you plan to use any credit cards. Using them too much can cause you to get into debt. Using them too little, or specifically not at all, can cause the credit card companies to lower your available balance. Both instances have the potential to lower your credit score – something you want to avoid at all costs.

Use Credit Cards When Traveling

Use Credit Cards When Traveling

Another good way to use credit cards wisely is when you travel. Sure, you can use a debit card when traveling, but that can be very risky. 

If you’re on vacation and someone steals your debit card information, they could potentially wipe out your bank account in a matter of hours! While you may have fraud protection on your debit card, you still may not get the money back until after your claim goes through. 

With a credit card, you’d simply alert the credit card company to the fraud – in many cases they may actually alert you first. A temporary hold could be placed on your card, and you could simply have another card by the time you return home. 

No actual money from your pocket will have ever been lost through the whole ordeal. Because of potential situations like this, I would suggest traveling with a credit card and some cash and leaving the debit card at home.

I discuss this more in Credit Card Advantages and Disadvantages.

Pay off debt strategically with credit cards

Pay Off Debt With Credit Cards

Now let’s explore a controversial way to use credit cards – to pay off other debt using promotional offers on balance transfers. I’m calling this a strategy because it does take some planning and a lot of discipline. 

The more you build your credit, the more you’ll get new offers and promotions from creditors – especially if you’re managing your credit cards well. With those offers and promotions comes the potential to actually help you pay off other debt.

For example, let’s say you have a credit card for which you’re carrying a balance. Then you get an offer in the mail for 0% interest on balance transfers for 12 months. You could potentially take advantage of that offer and use the new credit card to pay off the card with a balance. The benefit of this type of transaction is the 0% interest you’d pay with the new card, assuming your current card’s interest rate is above 0%.

Pay off Debt With Credit Cards

There are a few drawbacks to using credit cards in this way. One drawback is that you’ll have another inquiry on your credit report when you apply for it. Another disadvantage is that now you’ll have two credit cards, which means double the opportunity to increase debt. To be clear, you still want to avoid increasing debt as much as you possibly can. 

However, if done correctly, you could be saving yourself a lot of money in interest charges. Also, by freeing up your original card, you could potentially utilize a promotional offer on that card for something else. 

Again, you do have to be careful when utilizing this strategy. Those offers can be tricky, so you have to pay attention to the details and be sure to understand what you’re signing up for. I discuss this further in Deferred Interest vs Zero Interest Promotions. Also, you want to avoid getting into a situation where you’re actually in MORE debt because you didn’t have the discipline to not spend on BOTH cards.

Wrapping Up How to Use Credit Cards Wisely

Using credit cards can be a dangerous game. Without self-discipline, and a plan on how you’ll use the cards, you’re almost sure to fail. However, as shown above, there are many ways to use credit cards wisely and to your advantage. For more detail on Credit Management click here.

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Krystal Norwood-Morales, MBA, CFEI

Krystal is a Certified Financial Education Instructor and founder of Wild About Wealth, LLC. As a financial literacy advocate, she writes posts geared toward helping others improve their financial education and build generational wealth.

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Krystal Norwood-Morales, MBA, CFEI

Personal finance blogger

As a certified financial education instructor and financial literacy advocate, my mission is to teach young adults how to build generational through financial education. So let’s get WILD about WEALTH!

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