Simple Ways to Use Credit Cards Wisely

You’ve probably heard mortgages referred to as “good credit” and credit cards as “bad.” The truth is, any type of credit can be problematic if you don’t use it wisely, and any type of credit can help build your credit history and score if you make smart use of it. Credit cards are no different; using them wisely can have a positive impact on your overall credit standing.

Some simple steps and reminders can help you make smart use of your credit cards.

Understand interest.
Interest is essentially a fee that credit card companies and other lenders charge for you to borrow their money. It is usually a percentage based on the principal you’ve borrowed. It may help to think of interest as a portion of the total cost of anything you buy on credit. For example, if you use your credit card to purchase a flat-screen TV for $1,000 in January, and pay off the credit card bill in full as soon as the charge appears on your statement, the cost of the TV will remain $1,000. Wait until the next statement in March to pay, and interest charges will kick in. The cost of the TV will go up and will continue to rise until you pay off the balance of the charge.

Calculate the real cost of an item.
Now that you understand interest, you can dust off your multiplication tables to get an idea of the real cost of an item before you purchase it with a credit card. If you won’t be able to pay off a charge immediately, is the item worth the extra interest you’ll pay? You may decide it’s worth it to wait a few months and save toward the purchase so you can make it with cash.

Know that not all credit cards are the same.
Different credit card issuers may charge you different rates and offer you varying deals. Just as you would comparison shop for the best deal on a car or the highest-yield savings account, you can – and should – comparison shop for the best credit card deal. Each consumer will have a different idea of what’s best for him or her. For some people, the incentives and rewards associated with a store credit card may be worth a higher interest rate, especially if they shop there frequently and pay off balances immediately. For others, a bank card tied to their financial accounts may make more sense. Look for the credit card that works best for your lifestyle and credit use.

Credit cards do impact your credit report and scores.
How you use credit cards will certainly affect your credit report and scores. The question is, will it be a positive or negative effect? That’s up to you. Keep in mind that some credit card behaviors, such as paying balances off every month and paying bills on time, will reflect positively on your credit. Others, like maxing out your credit cards, carrying a large balance or carrying balances on too many cards can negatively affect your credit. Consider using an online tool to help you better understand how certain credit behaviors can influence your credit report and scores.

Finally, it’s important to approach credit card use with the right perspective. Your credit cards are there to work for you. If you find yourself working just to keep up with credit card bills, the plastic is running your finances and you’ll need to take steps to take control of your credit.