Many people fear credit cards because they fear credit card debt. But if you use them right, credit cards offer a lot of great benefits. Here are three good reasons to overcome credit card fear.
1. Debt is scary, but building credit is good for everyone
Carrying credit card debt is scary, but using credit cards responsibly is one of the easiest ways to build credit. Even if you have no plans of taking on debt in the future — no mortgage, no loans, no money owed of any kind — you need to build your credit. Your credit may be taken into consideration when renting an apartment, applying for a job, getting car insurance or signing up for a cellular plan.
Of course, the key here is responsible use of credit cards. This means you pay off your balance in full each month and keep your balance from exceeding 30% of your limit. For instance, if your credit card limit is $1,000, keep your balance below $300 at all times. Balances are often reported mid-billing cycle, and credit utilization of more than 30% can hurt your credit score.
2. Credit cards let you reap rewards
Many credit cards have cash-back or travel rewards for your spending. Rewards generally run 1% to 2% of your total purchases. They’re made possible by interchange fees — the amount a merchant’s bank pays to a customer’s bank for the acceptance of credit card transactions. When you have a rewards credit card, some of this money comes back to you. The rewards can be travel or cash related.
But rewards are only useful if you pay off your balance in full each month. No credit card will give you rewards higher than your interest rate.
3. Charging it comes with liability protection
If your cash is lost or stolen, it’s gone. Unless a good Samaritan happens to find it and return it, you won’t be able to recoup your loss. Even with a debit card, fraudulent charges may not be covered. If you don’t report your loss in two business days, your liability is up to $500. After 60 days, you’ll be liable for every dollar taken out of your checking account.
But if your credit card is lost or stolen and someone uses it, your liability will not exceed $50. Even better, if your card is still in your possession and just the information is stolen, you won’t be liable for a single penny. Most people will be a victim of card fraud at some point in their lives, so it’s a good idea to use credit instead of debit to reduce liability. If you do want to stick with debit, report fraud immediately to keep your liability amount low.
Tips for avoiding the downsides of plastic
If you’re feeling emboldened, keep in mind that you still have to be careful with credit cards. Here are a few things to watch out for:
- Late fees and penalty APRs: Paying your credit card bill late may result in a late fee and an increased annual percentage rate (APR). To avoid this, automate your monthly payment or just be diligent about making your payment on time. Some credit cards will waive your fee on your first offense, but you don’t want to regularly forget to make your payment in a timely manner.
- Balance transfer fees: If you get into debt and decide to transfer your balance to another card, you’ll likely have to pay a fee of 3% to 4%. In general, only transfer balances that you can’t pay off in six months or less, otherwise the fee won’t be worth it.
- 0% introductory APR expiration: Many credit cards come with a 0% APR for 12 to 18 months, allowing you to carry a balance from one month to the next without accruing interest. This is great, but remember that the introductory APR will expire. For credit card newbies, it’s probably a good idea to pay off the balance in full each month, even when the APR is 0%.
There are plenty of things to be afraid of, but a credit card isn’t one of them. Responsible credit card usage can help you build credit, earn rewards and reduce liability if your card is lost or stolen. Credit card fees are easily avoided, and the benefits are great.
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