Like it or not, credit cards are one of those things we can’t quite live without. Just like your third cup of coffee, these little pieces of plastic magic are seductive in their allure but can unfortunately leave you wishing you hadn’t over-indulged.
So why not avoid credit cards altogether to prevent the inevitable regret? Well, because just like those multiple mugs of coffee, it’s kind of hard to function without them. So before you dive in and find yourself drowning in debt, let’s review two very simple and very important questions; they might just provide the lifesaving information you need to keep your head above water.
Why exactly do I need a credit card?
Nothing builds credit faster than a charge card. We aren’t born with great credit; we have to earn that number by borrowing money and then paying it back. Pay it back on time, and your credit score goes up. Pay it back late or not at all, and your score plummets. It’s a basic concept, but not always an easy one to follow.
Aside from building an enviable credit score, charge cards have other advantages, as well – saving us from unexpected emergencies being one of the biggest. We can’t plan for everything, and life often hands us lemons when we have no feasible way of making lemonade (like how can we afford sugar when we just backed our car into a telephone pole?). Costly vehicle repairs, leaky roofs, pest infestations, broken bones, broken teeth, broken pipes – these things add up quickly and most of us fall short when relying on our savings to handle a disaster. This is when a credit card really pays off.
And after a run of car accidents and hospital visits, we might want to treat ourselves to a nice little getaway. But wait…we are going to need a credit card for that, too. Rental cars, plane tickets, hotels, cruises – most of these things require a card number and usually immediate payment or, at the very least, an electronic deposit. For the health of your sanity and your savings account, have a Visa or Mastercard handy.
But how do I pay it off once I get it?
Let’s start at the beginning because which card you ultimately select will have a great deal to do with how easily you can pay it off. First, consider selecting a card with no annual fee. Banks want you to borrow their money so they can collect interest off of that borrowed money. Given this, there seems little reason to then pay that bank a usage fee for the “privilege” of using their card – so don’t. Secondly, you will want to compare interest rates as these vary. Typically, the lower the rate, the lower the chance your credit card bill will get out of hand.
Next, be sure to pay off the full balance due on the card each month whenever possible. People get into trouble when they start paying the minimum amount as interest is charged on the unpaid balance, interest which accrues quickly and actually compounds daily. To see how rapidly these amounts can build, play around with WalletHub’s online credit card calculator to make sure you truly understand the importance of paying the full balance monthly.
Finally, take a moment to explore a card’s incentives. Most banks offer some type of program to reward cardholders for using the card (travel perks, gift certificates, etc.). The most useful incentives, however, are cash rewards that can be applied straight to your bill, helping pay down your debt faster. Do not discount how helpful even 1% or 2% cash back can be, especially for those who plan to use their cards regularly. Over time, these points can accumulate to hundreds and even thousands of dollars which makes paying the cards off just a little less painful.
Should you get in a pinch down the road by overextending yourself on a particular card, you can sometimes buy a little time by opening a second card offering a zero percent interest rate on balance transfers for upwards of a year. Be careful, though. This is, by no means, a routine way to pay off cards as your credit score can be negatively affected when multiple cards are opened in a short period of time.
Credit cards have their place at the top of life’s long line of necessary evils. Love them or hate them, you can’t really live without them, so get on board and learn to make them work for you. When used responsibly, a charge card might just move from necessary evil to your new best friend.