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A credit card can be a handy tool. It helps build credit for big purchases like a car or home and offers a simple way to buy things now. Using your card wisely is crucial for financial health, as debt can lead to big problems. Before you apply, consider your financial history and balance the rewards and benefits with their potential effects on your your credit score.
The Basics of Using a Credit Card
When it comes to using a credit card, there are some key general rules to keep in mind.
Carefully Review Your Credit Card Agreement: Before you sign up for a credit card and start spending, it’s important to be sure you’re aware of what you’re getting into. It’s integral that you read through any terms and conditions that could concern you before you even apply for a new credit card.
Pay Your Bills on Time: Paying your credit card on time is an important factor when aiming to build your credit score. Timely consistent monthly payments are an important factor when it comes to establishing a healthy credit history, so you can reap financial benefits in the future.
Make the Minimum Payment: It’s important to make at least the minimum payment on your credit card. Making timely minimum payments will positively affect your credit score. If you chose not to make the minimum payment on your credit card or pay less than the minimum payment, it could negatively affect your credit score, potentially increasing your interest rate, or result in late fees. The key is, don’t pay less than the minimum payment shown on your credit card statement, and pay more than the minimum payment when it’s financially possible. Paying your bills on time will ensure your credit score stays on a consistent positive incline.
Don’t Max Out Your Credit Card: Don’t spend all the available credit on your credit card. Your credit card limit will be dependent on a variety of things. Credit limit is calculated in one of three ways. In some cases, consumers are offered a predetermined credit limit. In other cases, a consumer’s credit limit is based on their credit history and credit score. In a few cases, a credit card issuer will do a more in-depth analysis of your credit history, considering any reasons why a consumer might be a potential credit risk and calculating the credit limits the consumer is currently receiving on their other cards. In addition, it’s also important to not charge more than you can realistically pay for, no matter what your credit limit is. Make sure that you can afford any minimum payments on your credit card. Getting a secure credit card where you set your own credit limit may be a great choice for those wanting to be sure they don’t spend more than they can afford to pay for.
Monitor Your Credit Score: There are plenty of free resources, websites, and apps that allow you to track your credit score for free. When you are starting out with no credit and/or learning to use your credit card, using a credit card monitoring tool can be both useful and encouraging when you see your credit score start to increase. Ultimately, keeping track of your credit score can help you keep track of your spending habits and quickly react to any negative impacts.
How To Use A Credit Card To Increase Your Credit Score
When you get a new credit card, it can be tempting to max out the balance because you can eventually “pay it back”, you’re borrowing money after all right? Not so fast, you want to be sure that you stay below your set credit limit. Again, when it comes to making the most of owning a credit card, it’s better to use your card and the available funds mindfully. If you can’t afford something without a credit card you can’t afford it with a credit card. Using that phrase as a rule of thumb can save you from ultimately ending up with a bad credit score, credit card debt, or putting yourself in a negative financial situation.
How to Use a Credit Card to Rebuild Your Credit
If this isn’t your first go-around with credit cards, you may be checking out this article after potentially using your card in a way that hurt you more than it helped you. The good thing is, there’s ways to rebuild your credit over time, even if you’re credit score is in the low range right now. When you’re in the process of rebuilding your credit with a credit card, look for cards that focus purely on helping you build (or rebuild) your credit score. While these credit cards may not have the best rewards and benefits, if you use your card responsibly, options and offers for higher quality credit cards will start to roll in. When you’re rebuilding credit, slow and steady wins the race.
What are the Pros and Cons of Using A Credit Card?
| Pros | Cons |
|---|---|
| Build your credit score | Potential debit |
| Receive beneficial reward offers from properly using your card and paying your bills on time | Not using your credit card responsibly and hurting your credit score |
| Receiving better credit card options as you responsibly use your credit card | Receiving low-quality credit card options if you use your credit card irresponsibly |
| Better interest rates with a higher credit score | Low-quality loan options with a poor credit history |
What if You Don’t Want to Own a Credit Card?
Ultimately owning a credit card has more benefits the disadvantages when you spend within your means. However, if you don’t want to use a credit card, there are other viable payment options, but know many of these options will not help build your credit score.
Other forms of payment include:
- Debit Card – With a debit card, funds are directly pulled from the available balance in your bank account. Though debit cards don’t report to the credit bureaus, it’s the next best option when you don’t have an active credit card.
- Venmo – Unless you apply for a Venmo Credit Card which requires a hard credit check, sending or receiving money with Venmo will not affect your credit score. Venmo is another popular alternative to owning a credit card.
- PayPal – Unlike some of the other payment apps and options, PayPal has started reporting to at least one of the credit bureaus depending on your account activity. For example, if you begin a PayPal Business or Premier account, you automatically give PayPal permission to conduct a credit inquiry. Another reason PayPal may pull your credit information is if you apply for a PayPal Credit or PayPal debit card. A hard credit check is required when applying for a PayPal Credit Card and a soft pull is required for their debit card option. Finally, another reason PayPal may pull a hard credit check is if an account is seen as “risky” based off account history. Your account may be seen as “risky” is you make multiple large purchases in a short amount of time, failed login attempts, or are using an already flagged account. PayPal is riskier if you don’t follow their terms and conditions, so be sure to read carefully before signing up.
- Cashapp – Personal transactions in Cashapp are not reported to credit bureaus. However, if you use the Cashapp Buy Now, Pay Later feature, they may report your account information to credit bureaus. Cashapp may also share any account defaults with credit bureaus as well. Again, have it as a rule of thumb to pay on time whether it’s an app or credit card. Otherwise, you may be hurting your credit without even knowing it.
Just keep in mind, be sure to read through any payment option’s terms and conditions to be sure you’re aware of any penalties. These apps can sneak up on you and be a negative impact to your financial history. Similar to using a credit card, responsibly using any “buy now, pay later” or payment app option is integral to making sure you stay on top of your personal finances.