Credit cards get a bad reputation because of their high interest rates, which can trap you in a lot of debt for a long time -- especially when combined with the fact that card companies usually set low minimum payments. Since people can get into financial trouble with credit cards, some financial experts recommend steering clear of them, and many consumers try to avoid using them.
In reality, credit cards can actually help you improve your credit, earn rewards, and otherwise take steps to improve your financial situation. You just need to make sure you carefully follow three rules if you want your cards to do that for you. Here's what they are.
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1. Pay your credit cards on time
One of the most important ways credit cards help your financial situation is by assisting you in earning a good credit score. But, in order for cards to offer this benefit, you need to pay your bills on time every time.
If you pay your credit card bill by the due date -- or at least by the end of the grace period -- you'll develop a positive payment record. Your history of paying your bills is the single most important factor that goes into determining your credit score. While a long history of on-time payments helps you earn the type of score that makes companies want to do business with you, paying late could have exactly the opposite impact, and you'll want to make sure to avoid it.
Setting up automatic payments could be the best approach to making sure you're never late with sending in what you owe.
2. Don't carry a balance
Carrying a balance can get you into a lot of trouble financially as credit card interest can be expensive, and you could get stuck paying it for a long time if you make only minimum payments. If your balance is too high, you'll also hurt your credit score.
But, if you avoid carrying a balance, you won't owe interest and will have a good credit utilization ratio. That's a metric that refers to the percentage of available credit you have used. It's the second most important factor in determining your credit score. If you can keep your utilization ratio below 30% -- using less than 30% of the total credit available -- this will go a long way toward earning a credit score that opens up doors for you.
3 Maximize your rewards
Finally, credit cards can help you improve your finances if you get a good rewards card and use it for everyday purchases.
Rewards cards can provide cash back or points or miles that you can redeem for trips or merchandise. If you get cash back and invest it or claim it as a statement credit to reduce the balance you have to pay, your credit card company will subsidize every purchase slightly and make everything you buy a bit less expensive. If you get miles or points, your card will also save you money by allowing you to avoid paying for trips you take or the other items you redeem your points for.
If you carry a balance, the interest you pay will cost you more than the value of rewards you can earn. But if you don't, these valuable rewards will do a lot to help improve your financial situation.
By following these three tips, you could end up with better credit and more money in the bank, so cards will definitely do a lot to help if you use them correctly.
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December 05, 2021 at 07:00PM
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If You Follow These 3 Rules, Credit Cards Will Help Your Finances - Motley Fool
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