If you have a credit card, you have an effective tool in your financial arsenal. While you may have heard horror stories about how credit card debt drove people to bankruptcy, that is not a common result. Responsible use of a credit card can actually help a person get great rates on loans or help an individual consolidate his or her credit card and other debts.
Using Your Credit Card to Consolidate Outstanding Credit Card Debt
A common method of debt consolidation is to put all eligible debts onto a credit card. To consolidate credit card debt, an individual can transfer all of his or her balances onto one card. The goal is to find a credit card with a low interest rate, which acts to lower the amount that must be paid while increasing the percentage of each payment that goes toward the principal balance. This allows a credit card user to pay off his or her high interest credit card debt months or years ahead of schedule.
Using Your Credit Card to Consolidate Other Secured or Unsecured Debts
Many lenders will allow you to pay your debts with a credit card. If the credit card has a lower interest rate than the interest rate on the loan, you can effectively consolidate student loan, auto loan or tax debt into one monthly payment. However, it is important to note that not all lenders will accept credit card payments. In some cases, a lender may add a fee for accepting a credit card payment. Those who choose to put student loan debt on a credit card may still be liable for paying that debt. If the government can prove that a debtor intentionally put student loan debt on a credit card with the intent of declaring bankruptcy, that could be considered fraud.
Use a Credit Card to Build a Credit History
Using a credit card can be a great way to build up a credit history. Even if you only charge a few dollars a month, the fact that the monthly payment is made on time will establish a person as a responsible user of credit. Whether or not a person makes timely credit or loan payments makes up 35 percent of an individual’s FICO credit score. Having a credit card in addition to a student loan or auto loan can add to a person’s credit mix and make them more attractive to lenders. This is because having multiple types of debt proves that an individual has experience with both unsecured and secured loans and can handle them without issue.
Secured Credit Cards Can Help Rebuild Credit After a Bankruptcy
Those who have just gone through a bankruptcy may not have many loan options available to them. However, a secured credit card may be the foothold that they need to climb out of credit purgatory. A secured credit card requires an individual to secure their credit line with an initial cash deposit. If payments are made on time for a predetermined number of months, the line may be converted from a secured loan to an unsecured loan. The credit card issuer may also return the cardholder’s security deposit with interest.
Use a Credit Card for the Rewards Points or Cash Back
Many credit cards allow an individual to acquire points that can be redeemed for a variety of rewards. Frequent travelers may be able to acquire points that can be used for free flights or hotel rooms. Some cards allow their users to acquire points on every purchase that they make that can be redeemed for airline miles or other perks.
Credit cards for those with even average credit may offer 1 percent cash back or more. There are often rotating categories that offer as much as 5 percent cash back on gas, online retail purchases or money spent at restaurants. This enables anyone to get a discount on the things that they buy on a regular basis. It can be an effective way to save money on holiday shopping.
Make a Large Purchase and Pay for it Over Time
If the stove breaks or one of the kids needs braces, a credit card can come in handy to help cover that emergency expense. Instead of raiding a bank or retirement account to get $1,000 or more quickly, it may be easier to simply put it on the credit card. If you open a new credit account, it may be possible to get 0 percent interest or save money on the first purchase made with the card.
This can help you avoid a dire financial situation while also helping you save money at the same time. However, make sure that you have some sort of a plan to pay the purchase off. Many people get into trouble because they don’t stick to their plan or have any sort of plan to pay off the debt. This can lead to making minimum payments and paying more in finance charges than you have to.
There are many great uses for credit cards. Whether you are trying to consolidate debt, gain rewards points or just trying to cover an emergency expense, credit cards are an excellent financial tool. As long as they are used responsibly, they can help people save money both now and in the future in the form of low interest rates and low finance charges when debts are paid off in a reasonable amount of time.
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