Credit cards are valuable tools when used as they are intended, to allow you to borrow money on a short-term basis to pay for goods or services. The key is that the money should only be borrowed for a short term. The easiest way to misuse a credit card and get into trouble is to fail to pay it off quickly, allowing the interest to accumulate and the balance to build to a level at which it can’t be managed.
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The best way to use a credit card is to get a rewards card with no annual fee that will give you some sort of bonus for your purchases, use it for most purchases, and pay off the bill completely every month. This gives you convenience, bonuses, and no costs, since you never have a balance to pay interest on.
Many people misuse credit cards by using one card to pay off another. This can work in the short term, but in the long run, it leads to carrying the debt longer than you should and paying too much interest. Another big mistake is to only pay the minimum payment on the credit card each month, which can take you months or even years longer to pay it off.
The Best Types of Purchases to Use Credit Cards For
There are many types of purchases for which a credit card is the best or, in some cases, the only method of payment to use. An article on the Canadian Credit Card Blog gives a list of the best places to use credit cards, and most of them are the same as they would be in the United States. Among the highlights, the article recommends using credit cards to save time and have more safe transactions on the internet, in gas stations, in hotels, for travel arrangements, in restaurants, and at retail stores.
It’s also a good idea to use credit cards for big purchases for a number of reasons, including the obvious one of being able to pay for the item over several months rather than all at once.
There is a measure of protection in buying a large item with a credit card, since credit cards generally allow you to get your money back if an item purchased with them is stolen or breaks within a few months of purchase. If you have a rewards card, big purchases can help you get your rewards more quickly or help you get larger rewards.
The Dangers of Not Using Credit Cards Correctly
What seems to inevitably happen when credit cards are not used correctly is that the debt piles up and the interest alone becomes more than you can pay. This will be part of a downward spiral, which will eventually force you to miss payments, either on your credit card, on other debt, or for other services. This can damage your credit rating and lead to fees and interest rates going even higher on your credit cards and loans, further exacerbating the problem.
When you stop paying on your credit cards altogether, your credit will be frozen so you cannot borrow anymore. According to the Everything Finance Blog, once you have gone delinquent on your account, it will be turned over to a collection agency or the credit card company could even decide to try to sue you. Often the only way out for someone in this much trouble is to file for bankruptcy, which can destroy your credit for years and cause you to lose personal assets.
The Best Way to Use Credit Cards to Build Credit
The best way to use credit cards to build credit is to buy what you can afford with them and pay them off on time. Often people will start to build credit with a secured credit card or a credit card with a co-signer attached, since they are easier to get than other cards when you have no credit or bad credit. Once they establish a solid payment history, offers will start to come in for regular credit cards.
Once you have access to regular credit cards, it’s a good idea to have at least two, but no more than five or six, credit accounts open but not to charge too much on any of them.
The idea is to have a great ratio of available credit to debt, which gives you a higher credit score. The other trick is, of course, to pay your credit card bills on time every month.
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