Treat Your Credit Card Like A Debit Card
Only spend money you already have, Gorenflo said. Relying on a credit card as an emergency fund can make a desperate situation even worse.
Have a separate emergency fund saved for emergencies, and only spend on your credit card as much as you can pay off in full each month.
There has been a misconception that carrying a balance on your cards can help your credit, but this notion is completely false, said Valerie Moses, senior relationship manager at Addition Financial, a credit union based in Lake Mary, Florida. By carrying a balance, you may end up paying significantly more money in interest in the long run. Instead, use your credit cards to pay for items that you have already budgeted for and know you will not be tempted to overspend on, like gas.
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How Do I Get A Credit Card
You must apply to get a credit card. The company you apply to will check your credit history. The company uses your credit history to decide:
- if you will get a credit card
- how much you will pay for the card
Before you apply for a card, be sure you compare at least three cards. You want to get the best deal you can.
Check Your Credit Score
Before you apply, check your credit score. If its not where it should be, you can request a copy of your credit report to understand the factors that have affected your score. If you have a poor credit score, you may have a harder time getting approved for a card. But we can help you make a plan and take proactive steps to bring your score up.
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Why Do I Need Credit
Although credit clearly has an important role to play in maintaining a functioning economy, you may still be wondering why you need credit as an individual.
Loans are a necessary part of life for many, says Katie Ross, education and development manager for American Consumer Credit Counseling.
Loans can enable wealth-building by allowing people to do things like pay for college, increase earning power, buy a home and benefit from rising property values, or start a business, Ross says.
Having access to credit can also be helpful in an emergency, explains Benjamin Jacobs, a certified financial planner at Elwood & Goetz in Athens, Georgia.
If unforeseen expenses arise or you need something you cant afford, being able to borrow could be a lifesaver, he says.
Accessing credit is important for another reason in todays society: consumer credit reporting. When you borrow money, creditors often report your behavior to credit-reporting agencies, including Equifax, Experian and TransUnion. Data on your financial behavior such as whether you make loan payments late or fail to pay is aggregated to create credit reports and evaluated to generate credit scores. Those reports and scores are used by lenders when they assess how risky it may be to lend to you.
In order to establish credit history, you need to have credit, advises Julie Pukas, head of U.S. Bankcard and Merchant Services at TD Bank.
Why You Should Get A Credit Card Even If You Dont Need One
Though youre not required to get a credit card and could probably go through life without one, you really should consider getting one. Credit cards offer tons of invaluable benefits, from credit building and fraud protection to rewards and the ability to spend money when you dont have cash on hand.
However, despite all of their benefits, credit cards are not for everyone. For example, if you know that having a credit card will lead you to spend beyond your means, its probably better to avoid having one. But keep in mind that you dont need to actually make purchases with a credit card in order to benefit from having one. You will build credit even if you simply maintain an account with zero balance.
If youre still on the fence about whether getting a credit card would be beneficial to your financial life, WalletHub has a helpful guide on the pros and cons of credit cards.
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What Are Your Typical Spending Habits
There are many different types of credit cards, including cash back credit cards, travel credit cards, airline credit cards and hotel credit cards. Most credit cards are defined by the types of rewards they offera cash back credit card, for example, offers cash back on every purchase, while a travel credit card offers points or miles that can be redeemed for travel bookings.
If you are interested in earning credit card rewards, take a look at the top rewards credit cards and ask yourself which card might be best for you. Do you want to earn cash back on grocery purchases, or are you more interested in a ? The more you know about your spending habits, the more likely it is youll be able to pick a rewards card that offers high-level credit card rewards on your most frequent purchases.
Common Credit Card Terms
Credit cards come with dozens of terms that determine what fees you can incur from using your card. Here are the most common terms:
- Annual fee: The fee cardholders are charged every year for holding a credit card.
- Balance transfer APR: The interest rate for balance transfers, which may be equal to or greater than the purchase APR.
- Balance transfer fee: Transferring debt from one card to another may cost you 3% to 5% per transfer.
- Cash advance APR: The interest rate you incur if you take out a cash advance, which is often one of the highest APRs you can be charged.
- Cash advance fee: The fee you’re charged for each cash advance, usually 5%.
- Foreign transaction fee: Purchases made outside the U.S. may incur a fee per transaction, usually 3%.
- Late payment fee: When you pay your credit card bill late, you may incur a fee up to $40.
- Minimum payment: The smallest amount of money you have to pay each month to keep your account current.
- Penalty APR: When you pay late, card issuers may penalize you with an interest rate that’s higher than your regular APR.
- Purchase APR: The interest rate you incur for new purchases that aren’t paid in full every billing cycle.
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I Need A Credit Card To Shop Online Or Rent A Car
In many cases, your debit card will cover you if you need to rent a car or shop online. In fact, you can do almost everything with a debit card that you can with a credit cardexcept spending money that you do not have.
For example, you can use a debit card to rent a car. The car rental company will put a hold against your debit card for a specific amount, so be sure to have that much available in your checking account. While it may be convenient to have a credit that you use solely for renting cars or paying for hotel rooms, it’s not necessary.
It can be easier to manage a car rental or a hotel rental with a credit card, however. If you choose to use a credit card for this purpose, be sure that you already have the money set aside to pay the full amount in your next billing cycle and avoid carrying a balance on your credit card or paying unnecessary credit card interest.
Using A Credit Card To Pay Down Debt
If you already have debt from past credit card use or some other loan, and the interest from that debt is making it difficult to get your head above water financially, having a credit card that allows you to consolidate your debt might be the best New Years present you could ask for.
Some credit cards, when you first get them, offer whats known as an introductory interest rate on balance transfers. That means if you transfer your existing debt from another credit card or other type of loan to your new card, youll pay no interest on that debt for a preset period of time usually between six and 20 months.
Depending on how much existing debt you have and your current interest rate, this can mean substantial savings. For instance, if youre currently paying 15% interest on $4,000 of credit card debt and you transfer that debt to a balance transfer credit card with a 0% interest rate for 18 months, youll save a whopping $900 in interest on that $4,000 debt over those 18 months. Thats money you can use to pay down your debt instead of seeing it disappear to pay interest.
In order to transfer an existing balance to a new credit card, youll typically have to pay a fee the current standard is 3%. But youll save much more than that by avoiding the sky-high interest youre currently paying on your debt, so you can pay it off faster.
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You Spend A Lot Of Time Overseas
Using a standard credit or debit card when you go abroad can be expensive, as many charge fees of up to 3% on foreign transactions. So if you spend £300, youll pay any extra £9 to your card provider. However, there are a number of travel credit cards that offer better exchange rates and dont charge you a fee when you spend on them.
These cards offer a secure way of spending while youre abroad. But again, theyre not available to everyone, so its worth using our Eligibility Checker before applying .
Many also come with relatively high interest rates, meaning they should be paid off in full each month. They often have annual fees too, so they really are only worth getting if the savings you make using them abroad are substantial.
When Not To Use A Credit Card
Paying with credit cards isn’t always better than paying with cash. Retailers honor credit cards because they want to make it easy for you to shop there. But the merchants still have to pay the major credit card companies a portion of every sale in the form of a transaction fee. Since a cash sale means more to the retailer’s bottom line than an equivalent credit sale, some retailers give discounts for the privilege of immediately taking your cash. On a big item, like a furniture set, for instance, the difference could be substantial. However, you’ll forego the consumer protections offered by credit cards.
There are other reasons when paying with credit isn’t better, and they have to do with you and your spending habits. Using a credit card may not be right for you if:
- You can’t pay your credit card balance in full and on time: If this tends to happen, stick with the debit card to avoid falling into credit card debt and incurring interest charges.
- You tend to spend more than you can afford: Paying with debit will limit you to spending money already earned.
- You can only get a credit card with a low credit limit and you have a hard time staying under the balance: Exceeding your credit limit results in costly fees, and doing this can also put a dent in your credit score.
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Key Information You Should Get
When you are given information about a credit card, it should include a summary box with standard key information about the card. This should include the interest free period, interest rate and other charges. This is so that you can easily compare different cards.
You can find more information about the credit card summary box including an explanation of what all the terms mean, on the UK Cards Association’s website at: www.theukcardsassociation.org.uk.
How Do Debit Cards Work
Your debit card is basically a plastic check. When you use it to make a purchase, it takes the money directly out of your bank account. So, if you try to spend $500 but only have $250 in your account, the bank will decline your transaction.
Because the money comes out of your account as soon as you swipe, you wont get a bill and you wont pay interest. You might, however, face overdraft fees if you try to spend more money than is in your account.
Debit cards also work as ATM cards. You can use them to take cash directly out of your bank account.
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How To Use Your Credit Card Right:
To avoid being debt-laden due to unfettered spending on your credit card, keep the below tips in mind:
- Read the fine print so youre aware of all the charges and conditions that govern your card.
- Dont spend more than you can pay back.
- Avoid putting daily purchases on your card so that youre aware of how much youre spending.
- Periodically check your credit limit and rein in spending when youve crossed 40% of your available credit limit.
- Choose an EMI option for large purchases put on your card to avoid having to pay interest on outstanding card amounts.
- Always keep at least 40% of your credit limit for emergencies.
- Plan your purchases and use your card only for planned purchases. Avoid impulse buys on your credit card.
- Always try to pay your credit card bills in full each month to avoid the interest charges.
- Never miss a card payment, as this will result in higher charges and a hefty penalty.
- Approach the bank if youve overspent on your card. They could help you devise a pay-back plan with a fixed rate of interest to avoid you falling deeper into debt.
Use the above tips to avoid the pitfalls of card debt so you can enjoy a stress-free future with your credit card.
How A Credit Score Is Calculated
Its impossible to know exactly how much your credit score will change based on the actions you take. Credit bureaus and lenders dont share the actual formulas they use to calculate credit scores.
Factors that may affect your credit score include:
- how long youve had credit
- how long each credit has been in your report
- if you carry a balance on your credit cards
- if you regularly miss payments
- the amount of your outstanding debts
- being close to, at or above your credit limit
- the number of recent credit applications
- the type of credit youre using
- if your debts have been sent to a collection agency
- any record of insolvency or bankruptcy
Lenders set their own guidelines on the minimum credit score you need for them to lend you money.
If you have a good credit score, you may be able to negotiate lower interest rates. However, when you order your credit score, it may be different from the score produced for a lender. This is because a lender may give more weight to certain information when calculating your credit score.
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Late Payments Damage Your Credit Rating
If you make your payment after the monthly deadline on your statement, youll have to pay a late payment charge.
Any 0% or other introductory rate could also be withdrawn. Plus, other companies will see you were late paying as part of your credit record.
This could have a negative impact on future credit applications, such as applying for a mortgage or a car loan.
Who Can See And Use Your Credit Report
Those allowed to see your credit report include:
- banks, credit unions and other financial institutions
- offer you a promotion
- offer you a credit increase
A lender or other organization may ask to check your credit or pull your report”. When they do so, they are asking to access your credit report at the credit bureau. This results in an inquiry in your credit report.
Lenders may be concerned if there are too many credit checks, or inquiries in your credit report.
It can seem like you’re:
- urgently seeking credit
- trying to live beyond your means
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Using A Microsoft Account Balance To Make A Purchase Xbox
If you dont have enough funds to cover the past-due balance, youll be asked to use a credit card to cover the remaining amount. If you dont want to use your Missing:
Cons To Not Having A Credit Card
Forgoing credit cards can make it difficult to build a decent credit history with a good credit score. Typically, college students get a first credit card in school, which enables an early start to building a credit history. Once theyre ready to buy a car with an auto loan or purchase a house and take out a mortgage, their credit history should be deep enough that its possible to be approved for a loan. Without this kind of history, it can be difficult to make large financial purchases later in life.
Using only cash or a debit card can have limited rewards potential, as well. One of the perks of owning a credit card is receiving rewards or cash back on groceries, gas or travel purchases. Some U.S. banks offer small rewards with debit cards, but it can be difficult to find rewarding debit cards.
One other con to using only debit cards is that they dont offer the same type of purchase or fraud protection. Refunding fraudulent purchases to a checking account can take longer or may not happen at all depending on the bank or situation.
And finally, activities such as renting a car or staying in a hotel room can be more complicated if you only use a debit card. Some companies will take a hefty deposit from your checking account if you use a debit card, which could tie up your money for days.
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