Credit cards are really tempting. You hand over your card, and get that new shirt, pair of jeans or whatever shiny new object you’ve been dreaming of, and your wallet stays just as full as it was before you made your purchase. Who can resist?
Credit cards often get a bad rap because they are so easy to use the wrong way, but when used the right way, credit cards can actually be a good thing. In fact, credit cards can actually benefit your finances in a few different ways, from helping your credit score to scoring you free stuff, just for paying with them.
1. Improving Your Credit Score
Your credit score, which is a number between 300 and 850 is an indicator of your trustworthiness to lenders, and is based on how reliably and consistently you use credit. It’s not calculated simply by having a card (although that is part of it). The score is calculated from six different factors, which represent different types of credit behavior:
- Percent of on-time payments
- Open credit card utilization
- Derogatory marks, such as accounts in collections or bankruptcies
- Average age of open credit accounts
- Total number of accounts
- Total hard credit inquiries
By regularly using a few cards and consistently paying them off in full, as well as staying comfortably within your credit limit, you’re well on the way to good credit. For more information on how exactly these factors affect your credit score and how you can use them to your advantage, read Your Credit Score: Everything you Need to Know.
2. Earning Rewards, Points and Cash Back
If you haven’t started using cards that reward you for spending with airline miles, points or cash back, you’ve missed the boat.
No matter how your credit card rewards you (it’s usually in something like miles, points or cash back), the systems generally work the same: For every predetermined amount you spend, you’re given credit that you can redeem for some sort of reward, like a plane ticket, a night at a hotel or simply a check.
Before choosing a card that fits you best, you’ll want to compare your options to see which is the best fit, we can help with that.
This isn’t an excuse to overspend in pursuit of a few points, but if you’re going to spend money anyway, you might as well be rewarded for it.
Ideally, you already have an emergency savings account, most financial advisers recommend that you have at least six months worth of income put aside into an emergency savings account. But if you’re like most of us and have a less-than-ideal emergency fund, or you’re without immediate access to that account, a credit card can fill in the gap. You can cover your costs with that card when disaster strikes, then pay the bill using the funds set aside specifically for that purpose.
Interested in starting an emergency savings account? With the new year just around the corner, now is the perfect time to get started.
Until the next time,
– Katie T.