Emily is a 27-year old married graduate student living in North Carolina. Her blog, Evolving Personal Finance, focuses on navigating the financial transitions common for young adults.
Hi everyone, future doctor* here! I’m going to tell you what’s what regarding your credit card usage. Just like drugs, credit cards have prescribed uses in which they can be safe and helpful. However, if you move into off-label uses or even abuses, they can burn you. You could end up in consumer debt, paying fees and interest on top of what you charged. You may even develop an addiction!
Treat your credit card as you would a debit card – only make purchases for which you already have money in the bank. Always pay the full balance before it comes due. Use the credit account only as an intermediary between your money and the retailer, not a way to delay paying for something.
Tips: Use an aggregation site like Mint to help you keep track of all your accounts and to monitor how your spending matches up with your budget. Commit to paying off the balance at the end of each budgeting period, well before the due date. Check your statements through for accuracy before paying them. As a fail-safe, consider putting your credit card on auto-pay just before the due date.
Protection: Using a credit card can protect you in some circumstances. If a retailer charges you incorrectly or won’t accept a return, the credit card company will go to bat for you. If your card is stolen, the credit card company will reverse those charges and you haven’t lost any money; if your debit card is stolen it may take time to restore your account balance.
Perks: If you have a rewards card, you can earn cash, frequent flyer miles, or other types of sign up bonuses from your credit card just for your normal spending. There are other perks as well, like rental car insurance, extended warranties and zero foreign transaction fees – check the fine print on your card for the specifics! Be sure to choose rewards that best fit with your spending habits and lifestyle and watch out for downgrades in the rewards structure.
Build your credit score: Revolving debt is a component of your credit score. To boost it, you should have lots of credit available but only using a small portion of it (still without carrying a balance). Cultivating a high credit score may help you get a lower interest rate on future debt.
Warnings: Be sure to choose a card that either does not have an annual fee or has an annual fee that will be eclipsed by the rewards you are certain to garner. (You can also ask for it to be waived.) Don’t become so enamored by the advantages of using credit cards that you deviate from following the directions perfectly!
There are other common ways that credit cards are used that are not risk-free but may confer certain advantages.
It is possible to use a credit card as your emergency fund. Some people hate leaving their emergency funds in cash in the bank because they feel they are passing up potential investment returns. These people might use a credit card for quick money in the case of an emergency, giving them a little bit of time to turn their investments back into cash. If they still pay the balance off in full before it comes due they will not have paid any interest. This approach to an emergency fund, however, leaves open the possibility of having to sell the investments at an inopportune moment and losing principal.
Some credit cards can also serve as 0% loans. If you pay the card off within the promotional 0% balance transfer or purchase period (for example, one year), you won’t have paid any interest. Transferring existing debt to this kind of card may be worthwhile if the interest saved justifies the balance transfer fee. However, if you don’t pay off the debt within the 0% period, you may have to pay even more interest than you would with your previous card, depending on what the rate resets to.
Warnings: Off-label use of credit cards may be a gateway to living beyond one’s means. Making a small mistake can result in large interest charges or late fees.
You will know that you are abusing your credit cards if you:
- Ever pay interest or late fees.
- Are “a month behind” – if you are making purchases you couldn’t pay cash for and waiting for your next paycheck to pay off the card.
If you find yourself abusing your credit cards, you should switch to an all-debit or all-cash spending model until you have learned to live within your means. It may be useful to seek out a community of other people committed to using credit cards properly or not at all.
I hope that you now understand the beneficial, sketchy, and dangerous ways that you can use a credit card! Credit cards can have wonderful effects if you stick to the prescribed use.
* Not that kind of doctor – I’m working on a PhD!
Do you use credit cards as prescribed or for off-label uses? Have you ever abused credit cards? What would you add as tips for staying within the “prescription?”