Discussing the best way to handle credit cards can be a controversial topic. Believe it or not, the people in your life probably have surprisingly different ideas about how to properly use plastic.
For instance, some people think it’s a good idea to only use credit cards for very large purchases. Is this a good strategy? Let’s dig into the details to find out.
Assess your credit card M.O.
Taking a moment every now and then to assess your credit card habits never hurts, so read over the following profiles and decide which sounds most like you:
Card user #1: Uses a rewards credit card. Swipes card for every purchase he possibly can, even small ones. Keeps his total outstanding balance below 30% of his available credit. Pays all credit card bills on time and in full.
Card user #2: Uses a credit card from his local bank; it has a rewards program, but he barely pays attention to his points. Uses a debit card for most transactions in order to avoid debt. From time to time, a large expense will pop up – for this he’ll use his credit card. He pays off the purchase within a few months, then lets his credit card sit in his wallet until the next big expense rolls around.
The problem with only swiping for big purchases
If you sound more like credit card user #1, nice work! You’re showing a lot of characteristics of the ideal credit card user.
If your plastic habits are closer to those of credit card user #2, you should know that there are some serious drawbacks to your system. If you only use a credit card once in a while for a large purchase, keep in mind that:
You could be damaging your credit – If you use your credit card for only large purchases that you pay off within a few months, you probably think you’re keeping your debt under control. But you could actually be overusing your credit.
Thirty percent of your credit score comes from your credit utilization ratio. You should never use more than 30% of your available credit. If your large purchase pushes you over that threshold, your score is taking a hit.
You’re paying through the nose in interest – Putting a big expense on your card and paying it off over time seems like a good way to deal with a cash shortfall. But doing so will cost you; in May 2014, the average credit card interest rate hovered around 15%.
This means that if you don’t pay off that big charge within a month, you’ll end up shelling out a lot more for it in the long run.
You’re missing out on an opportunity to rack up rewards – Making a big purchase can earn you big rewards. But putting your regular expenses on your credit card is a great way to achieve the same goal without damaging your credit or costing you extra in interest.
Assuming you pay your bill in full each month and keep your spending under control, using your card frequently for smaller purchases is the way to go.
Retool your card habits for better credit and rewards
Now that it’s clear imitating credit card user #2 has its disadvantages, it’s time to put a plan in place to retool your credit card habits. Check out the Nerds’ tips for becoming more like credit card user #1:
- Make a budget that accounts for irregular expenses. This way, you won’t have to rely on credit to get you through a cash-flow crisis.
- If you do need to put a big expense on your card, consider transferring the balance to a 0% card. Just be sure you do this carefully.
- Use a credit card for all your regular purchases. Track your spending online to be sure you’re not buying more than you can pay off within a month.
- Pay your credit card bill on time, every time.
- Use a credit card that offers a rewards program you value. For help finding the right card, use our tool.
The takeaway: It might seem sensible to reserve plastic use only for large purchases, but this plan can backfire. Use our tips above to become a better credit card user today!
Big purchase image via Shutterstock