So what’s the big deal about credit anyway? We’ve mentioned before that life without credit cards is not that bad. The truth is, you don’t really need them at all…not to build credit, not to buy things, nothing at all. While not necessary, credit cards do make life easier and they are one of the most convenient ways to build credit. Add to that reward programs that can put extra cash in your pocket. Credit cards can offer big advantages, but only for those who use them responsibly. But what exactly does “responsibly” mean when it comes to using credit cards?
Irresponsible Versus Criminal
It’s obvious that charging items you never intend to pay for is irresponsible, but that kind of behavior is fraudulent and illegal too. What we really mean about using credit responsibly is using it in ways that give you the advantage, not the credit card company. What’s good for your credit is good for your overall financial health, so learning to use credit cards responsibly has more advantages than just getting you a good credit score or a high limit on your card.
Buy Only What You Need
Credit cards aren’t for the wants in life. You should pay cash for those. Credit cards are for items in everyday life that you can pay for in full when the bill comes due. These are everyday expenses that fall within your budget. When you pay it off every month, you can earn cash back. Save that cash for things you want, but never buy items outside your regular budget on credit. This way, you sidestep any threat of high balances that you cannot afford to pay.
When you use credit cards for everyday expenses, you gain the advantage of easy expense tracking. At a glance, you can see what you spend on groceries, gas and entertainment. But if you don’t track every expense, checking charges on your statement against receipts, you could get taken by unscrupulous vendors. Watch your cards closely and question any expenses that don’t make sense. This ensures your credit cards really don't cost you anything.
Never skip a payment and never be late. If you make one of these mistakes on your card, any special interest-free offers you had went out the window. In addition, the credit card company will increase your interest rate. You can try calling the company for forgiveness if it happens just once. But making such mistakes a habit will cost you big money. Just pay your bill in full, the same day every month, and you can’t go wrong.
Preparing for Life’s Emergencies
Many people think that keeping a card set aside in case of emergencies is a responsible way to use credit cards. But paying for emergencies with credit is a bad idea and should only be used if something serious goes wrong before you have built an emergency fund.
Save enough cash saved to cover most of the problems life may throw at you. Go for between $1,000 and $5,000 in a high interest savings account for your emergency fund. The last thing you want to do is pay interest and payments while trying to recover from a setback.
Because of the potential for abuse, the most responsible behavior is to save your money and then pay cash for everything you buy. But the advantages of easy tracking for your budget and credit card rewards are worth taking a chance if you know how to use your credit cards. When you learn the discipline needed to manage your credit cards well, you will have the strength to manage the rest of your finances responsibly as well.