How to Use a Credit Card Wisely

Credit cards used to be everyone's favorite thing until the credit crunch. The truth about credit cards is: they can be your best friend or your worst enemy. Credit simply means deferring some or all of what you owe on something you've purchased until a later date. In this way, credit cards allow you to purchase something that you wouldn't be able to afford all at once and pay it off over a length of time.

Good Use of Credit Cards

A good use of credit cards is charging consumables you would normally purchase--hopefully on a credit card that gives you a cashback bonus or rebate--and paying it off in full every month to establish good credit. In addition to building a good credit history, it also allows you to earn more interest on your savings if your savings are in an interest-bearing account. The credit card works for you twofold: first, it gives you some cash back on things you would buy anyway, and second, it allows you to keep your money in savings for as long as possible and earn more interest in the interim.

Bad Use of Credit Cards

A bad use of credit cards would be buying something you can't afford, and won't be able to afford in the foreseeable future, by charging it on the credit card, just because you really want it. There are all sorts of schemes that take advantage of this "buyer's impulse." Commercials prey on people who like the idea of not having to pay for something they bought for several years, even though the interest is accruing in the background and their purchase will be repossessed if they can't make the payment. This also hurts your credit rating, and a good credit rating is what allows you to get a reasonable loan and interest rate.

Why Credit Card Companies Are Rich

While credit card companies do make money off of restaurants and businesses that accept their particular credit cards, the big money-maker for them is consumer interest. It's no secret that the interest rates they charge can be astronomical. To put it in perspective, let's say you put your money into a Certificate of Deposit or a bond that gave you 8% interest over a 5-year period. Credit card companies sometimes charge 25% APR! That's a 25% return for them on your money, not to mention the various fees they charge. It is much harder to make money in the U.S. than to keep it, and this is a perfect example.

What You Should Do

The simple truth is, it's tempting to use a credit card for purchases you can't afford. In order to be financially sound, you have to fight that urge. Try having just one or two credit cards instead of a whole gamut; this helps you keep track of your expenditures more easily. When you use a credit card, try to picture the money an item costs leaving your savings account. Good luck! I hope you give credit where credit is due.