My family uses credit cards all the time. We use them for daily spending, travel, large purchase, really just about everything that we can pay for with a credit card, we do. Not only are they convenient, but they make it simple to track spending, and the rewards programs are worth thousands of dollars in cash back and points to us every year.
However, credit cards can also wreak havoc on your finances and your credit. (My wife and I can both attest to this from making terrible mistakes when we were younger.) If you're thinking about opening a credit card -- whether your first one or just your next one -- read this article for some tips and suggestions on how you can use credit cards to your benefit, and avoid getting taken to the bank.
Why are you opening a credit card?
There are a lot of good reasons to open a credit card, like points and cash back for things you spend money on regularly, taking advantage of a low- or no-interest promotion to more cheaply pay off existing credit card debt, or improving your credit history. The thing is, there are literally hundreds of credit cards out there, so before you just fill out the next "pre-qualified" card offer you get in the mail, you should consider a few things:
- What is your credit score and history?
- What will you be primarily using it for?
- Did you research other card options?
Let's take a look at each of these.
Before you apply, know your score
Just because you got a "pre-qualified" or similar language offer from a credit card company, you're not approved yet. That won't happen until you actually submit a credit application, and give them approval to review your credit history and score. And if you don't actually qualify and get declined, the credit inquiry will ding your credit score a little bit.
So before you just blindly throw that application into the ether, know your score and your credit report. The credit reporting bureaus are required by law to give you a copy of your credit report (not your score) once per year free of charge.
You'll most likely have to pay for your score, but you can get at least one bureau score for free if you look around. Mint, the personal finance software, for example, gives you a credit score from one of the credit bureaus free of charge every few months, and some credit cards do the same as a perk for customers.
Knowing your score will make it much easier to find the the card with benefits you want, and that you're more likely to be approved for.
What will you use a credit card for?
As I wrote in the intro, my family uses credit cards for almost everything from gas to groceries to shopping to travel. However, we almost never pay any interest charges, since we pay off the balance in full each month. Here are a few key categories for my family:
- Regular spending, like gas, groceries, pharmacy, and office supplies.
- Low- or no-interest financial promotions for large purchases and balance transfers.
While your situation may be different, we've found that having a few cards that pay the best rewards for certain categories gives us the most benefit. The key takeaway is that we use cards with the best perks, based on where we spend the most money, and that we pay the balance in full each month or before the end of the promotional period.
If you're getting a card specifically to boost your credit score, you should still focus on a spending category, versus planning to only occasionally use it. In my experience, people are more likely to create excessive debt on "special, occasional" purchases, versus in planned spending categories. Either way, disciplined spending and paying off are the two things that allow credit cards to be beneficial, versus an albatross.
A big fat caveat about credit card "research" sites & balance transfers
There are a lot of great resources online to compare credit cards, and it's well worth using them to help find the right card for you. However, it's important that you understand that essentially all of these websites make money from advertising and marketing -- you guessed it -- from credit card companies.
Don't get me wrong, that doesn't make websites like Mint, Credit Karma, creditcards.com, and credit.com bad; after all, it's the advertising that makes these resources available. But it does mean that you should shop around for the best card.
As to balance transfers, be sure to read the fine print. For example, an offer for 0% for six months on balance transfers may sound good, but if it comes with a 5% balance transfer fee, that's the equivalent of a 10% APR. Be sure to factor this in if you're shopping for the best balance transfer offer.
It's about responsible spending
Credit cards can be wonderful or wonderfully destructive, and that has more to do with you than it does with the perks of the card you choose. At the end of the day, don't take the decision to open a credit card lightly. If you can benefit from another card, hopefully the suggestions above will help you get the most for your credit.