It is much better to have a credit card and use it responsibly than to not have a credit card at all.
According to Fair Isaac Corporation (as in “FICO”): “People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.”
Why you want a credit card
- Having a credit card adds to your credit history and provides a track record of how well you handle debt.
- If you have a thin credit profile, you may get unfairly rejected when looking for a loan, a job, or an apartment:
- Lenders will check your credit report when you apply for a mortgage, car loan, or other loan. Without a strong credit history, you may have a hard time finding a lender willing to take on the risk of lending to you. If you are able to find a lender, you will probably end up paying a higher rate, because the statistics identify your profile as a higher risk.
- Many landlords check your credit report before agreeing to rent property to you.
- Some employers check your credit report before making hiring decisions.
- Keep in mind, though, that payments made on student loans also become part of your credit history, so even if you don’t have a credit card, you will still have some payment history in your credit profile if you are paying down student debt.
- A credit card, used responsibly, shows potential lenders that you are more likely to be a good candidate for a loan.
- Credit cards provide the convenience of not having to use cash for in-person purchases (especially on big-ticket items) and facilitate the process of making online purchases.
- Credit cards can also provide perks or rewards for purchases that you need to make anyway.
Pay your credit-card bill in full every month
- Ideally, you should pay your credit-card bill in full every month. And on time.
- Paying just the minimum balance is a debt trap that will add interest and then compounded interest as the months go by.
- If you can’t pay for something at the end of the month, then you should really reconsider that item.
- Look for a less expensive alternative or a way to do without.
- If these are necessary, one-time purchases (maybe you just moved into an apartment and need to buy a bed, furniture, cookware—you’ll save money by cooking at home), this may be a time you’ll need to use your credit card anyway. However, make sure you can pay off that debt quickly to avoid compounded interest on your unpaid balance.
- Even if you can and do pay your bill in full every month, you don’t want to max out your credit card by charging up to the full amount of your credit limit.
- Part of your credit score is based on utilization rate, which is your outstanding balance divided by the amount of available credit.
- If you truly need and can handle more credit, you might want to either ask your credit-card provider to increase your credit limit or look into taking out a second card (with its own credit limit), so that your overall utilization rate will be lower.
If you do have credit-card debt
- Start chipping away at the debt any way you can by cutting back on your expenses or looking for possible ways to bring in extra income (or both). (For ways to cut back on expenses, see “Before you break the piggy” and “Savings Apps.”)
- Consider automating payments to your credit card company each month, in addition to paying just the minimum amount. Even a small extra boost every month will make a difference. However, make sure you don’t overdraw your bank account; you’ll likely end up incurring a bank fee and a late fee on your credit card (as well as additional interest).
- If the debt is from multiple cards, start paying down the highest-interest debt first. (See “Rank the debt by interest rate from highest to lowest and pay off the highest-interest debt first.”)
- Look into consolidating or refinancing at a lower rate. (See “Consider consolidating or refinancing.”)
- If you have a small amount of credit-card debt, consider a balance transfer to a lower-rate credit card or a card with a 0% introductory rate for balance transfers. (See “Consider a balance transfer.”) But remember there is usually a transfer fee, so read the fine print carefully. Also consider how long the introductory rate is good for, what the rate will be after the initial time period is over, and whether you will be able to pay back the full amount before the introductory rate expires. See here for more details.
- You can also look out for those 0% APR checks. (Yes, you’ll pay a transfer fee, but if you do the math, this could be a good option in some cases. Just make sure you’ll be able to pay back the full amount before the 0% introductory time period is up. These often run from 6 months to 18 months, but read the fine print.)
- Call your lender to ask for a lower rate. Sometimes a simple phone call—and a good repayment record—are all it takes.
- Other than absolute necessities (like unexpected medical bills, e.g.) don’t put any new charges on your credit card until you have paid the balance down to zero.
- See “Paying Off Consumer Debt” for more detail on how to handle credit-card debt.
- When you have finally paid off all your debt, don’t slip back into old spending habits that will just get you back into the same situation again.
How not to use credit cards
- Credit cards should not be thought of as a loan or a way to spread payments over time, because the interest rates on credit cards can be ridiculously high (16% or more).
- Paying for items over time with such high interest means you end up paying much more for those items than you should.
- Compounding interest at such high rates can quickly lead to a huge pile of debt.
- It’s better not to buy most items than to drag them along from month to month on a credit card, building a mountain of debt in the process.
- Do not think of credit cards as free or plastic money. That bill is coming and needs to be paid.
- Don’t take out a credit card just to get the rewards. Having lots of additional cards could have a negative impact on your credit score in some cases.
- Don’t be fooled by teaser rates that will expire in 6 months or so. Read the fine print and make sure you understand the fees and rates that will apply for the long term.