3 of the Smartest Ways To Use a Credit Card
Despite the stigma they carry, credit cards can be extremely beneficial if you're financially savvy.
Contributing Writer at Tally
March 9, 2021
There is a fine line when using credit cards. They carry a stigma, primarily due to high interest rates, compounding interest, and high rates of credit card debt. However, credit cards can be a useful tool that can benefit your personal finances.
In this article, we’ll cover the three smartest ways to use a credit card. Plus, we’ll give you a few tips and tricks so your credit cards work for you, not against you.
The 3 smartest ways to use a credit card
Have you ever wondered, "What's the best way to use a credit card?" The best way depends on your personal financial situation. But here are three smart uses that might work for you.
1. Make money from your purchases
Some credit card companies offer rewards with their best credit cards. For instance, a card may offer 3% cash back on purchases. You can use the money you earn to purchase gift cards or pay a statement balance. Cards may also offer travel rewards, which you can use to cover flights and hotels.
So, how can these work for you? Let's say that you spend $1,000 per month with a debit card. A debit card links directly to your bank account and allows you to only spend cash that you have in the account. This is an excellent tool for budgeting. It promotes healthy spending habits and prevents you from accumulating debt. However, you're missing out on cash back or rewards programs in the process.
In an alternative scenario, let's say that you use credit cards instead of debit cards. The card that you use offers 3% cash back on all purchases. If you put $1,000 in purchases on the card, you'll receive $30 cash back. If you put this toward your statement balance, you'll only need to repay $970 instead of the full $1,000. Essentially, the credit card issuer gave you free money.
Why would lenders do this? For one, it encourages you to use their card. Financial institutions, like Capital One and Citi, charge merchants transaction fees. They make money whenever you use their card.
Second, these cards are often reserved for those with good credit. The credit card issuer has identified you as someone likely to make timely monthly payments based on your credit report and payment history. Lenders reserve the best cards as an incentive for those most likely to pay their credit card bill.
2. Treat your credit card like a debit card
As mentioned, there are bad stigmas surrounding credit cards because they are often associated with high debt. People rack up debt on cards because they, in essence, provide access to "free money."
Imagine you've opened your first credit card. Now, all of a sudden, you have access to a $5,000 credit limit (otherwise known as your spending limit). This is a welcome change of pace, as you typically have no more than $1,000 in your checking account at the end of each month. So, you take the extra $4,000 and splurge on a vacation.
Of course, the problem arises when you receive your bill at the end of the month. You've used all of your available credit, but you only have $1,000 in the bank to pay the bill. This leaves you with a $4,000 balance. Your checking account is now empty, and the next month, your lender charges you interest for not paying your balance in full.
By not paying in full, the interest begins to compound on itself. It could take years to pay off the balance and the interest.
To avoid this, treat your credit card like a debit card. In other words, only spend the money that you know you have. Consider paying off your credit card balance at the end of each week in full. This will help with budgeting and ensuring that you are only spending money that you have in your account. It will also help with building credit since it will keep your credit utilization low while also demonstrating that you make payments on time.
If you’re worried about having too much available credit at your disposal. You might want to ask your lender to reduce your credit limit. This may cause a temporary hit to your credit score, as your credit utilization ratio could go up. But the pros outweigh the cons. By limiting spending and paying off your balance in full each month, you’ll boost your credit score quickly.
3. Use it as a tool, not a lifeline
It’s easy to use credit cards as a lifeline. You may find yourself in an emergency situation with an unexpected need for extra money, such as a new engine for your car or medical bills.
These are the kinds of expenses that you don’t see coming and can unfortunately lead to unintended credit card debt.
While you can never fully plan for these surprises in life, creating an emergency fund or rainy day fund is a good first step. Just saving a little bit at a time can help you set aside enough money to cover unexpected costs. Then, even if you need to pay for an emergency on your credit card, you'll have the cash available to pay it off.
What if you carry credit card debt?
If you currently carry credit card debt, it’s OK to focus on paying off your debt before trying to earn perks from a rewards credit card. You may want to consider a balance transfer card instead, which can be a helpful tool for paying off credit card debt.
Another way to pay off outstanding credit card balances is through Tally.
Tally is a credit card payoff app that automatically manages your money for you. Tally extends a line of credit to you. The app will then pay off your balances in the most strategic way possible while also ensuring that you make your minimum payments each month, no matter when the due date is.
You'll save money on interest charges and pay off debt quickly when using Tally. You'll also begin to build credit, improve your credit history, and free up cash for future budgeting needs.
Let your credit card work for you
Credit cards can be a useful tool, no matter your personal financial situation. The key is letting them work for you and your goals.
If you are looking to build credit, focus on using your credit card like a debit card and try to avoid using the entire credit limit. You might even consider making payments every week to prevent yourself from overspending.
If you already have good or excellent credit, you can focus on the true perks that lenders offer, like cash back and rewards. As long as you pay your balance in full and on time, you’ll be able to avoid the potential downsides of a credit card, like late payments and interest.