You’ve heard the warnings before: Don’t use credit cards, especially if you already have debt. There’s good reason for this advice, namely that it’s all too easy to overspend and rack up more debt that’s costly to repay, thanks to high interest rates that average 15% (but can easily run upward of 20%). But avoiding plastic altogether may not be necessary, even if you have student loans you still need to repay.
That doesn’t mean you get to swipe your card with abandon. When it comes to the best way to use a credit card, think of it like any other tool. It can be used wisely to construct something that benefits you, or it can be used irresponsibly and cause additional problems. Here’s the best way to use a credit card to your advantage.
How to use a credit card wisely
A credit card can help your finances if you know what you’re doing. That starts with understanding what “responsible use” means and looks like. Here’s a rundown of the best way to use a credit card:
- Never charge more than you can afford.
- Don’t charge more than you planned to spend or budgeted for. It’s easy to rack up additional purchases because you don’t have to part with cash right away, but the wisest move is to use your card as if it were debit or cash.
- Pay off all balances on time and in full.
- Limit the amount of new credit you request. Opening multiple credit cards can ding your credit score, and managing several different lines of credit can complicate your financial situation.
- Avoid consistently charging up to the limit on your credit cards—even if you budget for the spending and can make the payment in full and on time. Part of your credit score is determined by your credit utilization ratio, or the amount of credit you use in relation to how much you actually have. The lower your ratio, the better your score.
Consider these the basic ground rules for credit card use. If you can’t reliably follow all of these while also managing your student loan payments, sticking to cash or debit for your spending is the best course of action.
If you can agree to the above rules and you hold yourself accountable to them, you may be able to use credit to your advantage to give your financial situation a boost.
How responsible credit card use can help your finances
1. Credit cards offer consumer protections
When you use cash, your money is gone when it leaves your hand. There’s little to no recourse if you have an issue with your purchase or if the money is stolen.
Debit cards offer a little more protection, but not much. When you swipe your debit card and a transaction posts, that money is taken directly out of your checking account. Even though you can dispute the charge, that cash is gone until the issue is resolved. And if your debit card information is ever stolen, the thief has direct access to all the money in your account.
Credit cards, on the other hand, offer a variety of protections for users. Most provide some degree of fraud protection, keeping you from being liable for fraudulent charges. You can dispute charges if necessary, and purchases placed on your credit card don’t impact your cash flow until you pay the statement.
2. Responsible use over time can help build your credit score
If your existing student loan debt negatively impacted your credit score, repaying those loans over time will help repair the damage—but using a secured credit card responsibly at the same time helps, too.
Again, for credit card use to help your credit score, you need to follow all the guidelines discussed earlier. Showing that you can consistently, successfully manage multiple lines of credit (from your loans and your card) will give your credit score a boost over time.
This is important because your score can impact your financial life in a big way. If you want to borrow money in the future (to buy a house, for example), your credit score will be a huge factor in determining the interest rate you receive on your loan. The better your score, the lower your rate.
That matters on big purchases, because even one extra percentage of interest can make the difference between saving hundreds or thousands of dollars over the life of your loan.
3. You can earn points and rewards for use
This is one of the biggest perks for responsible credit card users. Earning rewards that you can redeem on things like hotels or airfare allows you to save on purchases that might otherwise not fit within your budget between your regular bills and your student loan payments.
It’s important to understand, however, that you should never use a credit card for the sole purpose of trying to rack up points. This is a quick way to overspend, and that’s a slippery slope that can lead to carrying balances on your card, accruing interest, and getting even further into the red with your debt.
4. Credit cards allow you to maximize your everyday spending
This is another way to make the most of the purchases you need to make anyway. Depending on the card you choose, you can earn cash back rather than points or rewards for specific programs. This is a smart strategy if you have student loan debt in particular, since you’ll want to free up as much cash as possible to put toward your monthly payment.
5. You keep more cash in your pocket
One final way to utilize credit cards as a tool to improve your finances is to leverage offers like interest-free financing. The benefit is that you can plan your spending on your card and pay off the balance over time without paying interest. This allows you to make purchases you planned ahead for, without having to part with the cash all at once.
A word of warning: Be careful here. These offers come with many stipulations and are usually limited to a certain timeframe, like the first 6 or 12 months of having the card. In addition, making the payments on time is critical. Most of these offers include fine print that state if you miss just one payment, you’re responsible for paying a high interest fee on the entire balance on your card. Before taking this route, be sure you know and abide by the rules of the program.
As long as you can use a credit card to make responsible purchases and pay off your balance every month, you can benefit from one or more of the perks above. Do the necessary research when finding a new card and educate yourself on the rules and fine print associated with your account, and you’ll be well on your way to discovering how to use a credit card wisely.
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