We’ve all heard them — the horror stories that come with owning a credit card.
They’re the stories of people who build up mountains of debt that can take a lifetime to pay off. Or maybe you know someone who used a credit card, and had their identity stolen online or in an actual store (Target, anyone?).
While it’s reasonable to be wary of these incidents, there are still plenty of good reasons why you should consider owning and using a credit card. When used responsibly, credit cards can be instrumental to securing financial success.
Here are a few basic do’s and don’ts for using credit cards:
Do: Access a Line of Credit
Jumping into the world of credit may seem a little intimidating, but owning a credit card can have many benefits. Having quick access to a line of credit can help you pay for unexpected expenses. While it’s unwise to treat your credit card like an “emergency fund,” it can be a helpful resource when you’re low on cash or need a little extra time to pay off a larger purchase. Most of all, a credit card can help you establish a credit history and strengthen your credit score. Your credit score (also known as a FICO score) plays a vital role in your financial well-being. Taking that first step and opening a credit line is important to help ensure your financial health is protected, in the short and long term.
Don’t: Pay Only the Minimum
While it may not always be possible, it is strongly recommended that you pay off the balance of your card each month. Failing to do so can get you into trouble with interest. Interest is calculated on an annual percentage rate, or APR, and credit cards are notorious for having some of the highest APRs of all consumer debt. And unlike other forms of debt, such as student loans and mortgages, you can’t get a tax deduction from payments on credit card interest. Paying the entire balance every month can help you avoid interest charges.
Do: Research Alternative Cards
Not all cards are created equal. There are many different types of cards with varying characteristics for individual needs.
Reward cards are exactly what their name implies: they reward cardholders for using them. Rewards can come in the form of cash, gift cards, statement credit, airplane tickets or even entire vacations. Rewards can be earned through “points” or “miles” systems, usually valued at one point per dollar spent on a certain type of purchase. Each program has its own unique features and conditions. For example, some cards may give you “bonus” points for eating at restaurants or shopping at department stores.
Zero-percent APR and balance transfer are also popular credit card features.
Zero-percent APR is an introductory deal that allows a cardholder to carry a month-to-month balance without paying interest for a specified amount of time. Keep in mind that monthly payments still need to be made during this period to avoid negative consequences (late fees, a credit score downgrade, a large balance, etc.).
Balance-transfer cards allow you to transfer a balance from one card (typically one with a high APR) to another card, which usually has a more favorable rate. This can be used to consolidate credit into one, easy payment, rather than having multiple bills due each month. Before you commit to a carrier, be sure to shop around to find the right card to fit your personal needs.
Don’t: Overlook Card Details
As I mentioned above, not all cards are created equal, and different cards come with different sets of rules. For example, reward cards generally carry a higher APR compared to balance-transfer cards. Frequently using a card to pile up points can be a good thing, but overspending can lead to interest payments that can wipe out any sort of reward. Some cards also carry hefty annual fees, so you may need to conduct a cost-benefit analysis to make sure the rewards are valuable.
It’s also important to find out whether your card operates on rotating categories, or if the company sets a limit on the amount of rewards that you can earn each year.
If your card operates on rotating categories, that means your credit card company can award bonus points for certain purchases — say, eating at specific restaurants — in one quarter, and then rotate to a different category the next quarter.
On the other hand, a limit will put a cap on the total rewards you can earn in any given year. For example, your credit card company may give 5 percent cash back on the first $5,000 spent on a certain category, and then drop to 1 percent cash back after the cap is reached. Knowing the inner workings of your credit card can help you maximize your card benefits.
Do: Monitor Your Credit Score
Did you know that you can request a free credit report each year from any of the three major credit-reporting bureaus? Lenders evaluate these scores during the loan approval process, and landlords often reference them when conducting background checks of potential renters. Having a healthy credit score proves to lenders that you’re a low-risk investment, which can help you get a lower interest rate. The length of your credit history, on-time payment history and magnitude of your credit line are just a few factors that make up your credit score. Staying on top of your score — and your credit card — can mean a difference of thousands of dollars in interest payments down the road on mortgages and personal loans.
To obtain a free credit report, visit AnnualCreditReport.com.
Don’t: Get Lazy
It’s important to stay diligent when monitoring your credit card. Reviewing your monthly statements can reveal the warning signs of identity theft. You should also be proactive in checking for unauthorized purchases, suspicious lines of credit or other strange activity. If pouring through your statements each month sounds like a daunting task, consider outsourcing the responsibility to fraud monitoring services, such as LifeLock. Some credit card companies also offer fraud protection services that can alert suspicious activity, and can even offer limited liability if you fall victim to theft. (Click here for more information on preventing identity theft.)
These options are convenient, but in the end, no one is going to care more about your personal and financial well-being than you do. It’s in your best interest to play an active role in protecting yourself. No one wants to become one of those credit card horror stories. By acting responsibly and sticking to your do’s and don’ts, you should be well on your way to credit success!