Credit cards are powerful financial tools that make spending and tracking expenses convenient, and often more secure. Shopping online, reserving a hotel room, and renting a car are just a few examples of transactions that are easier when you use a credit card. In addition to convenience and security, credit cards also offer benefits for the cardholder, like rental car insurance, or a way to save money on your purchases, like cash rewards.
If credit cards can be so beneficial, why do many people fear them? Credit cards often get a bad reputation because of high interest rates, fees, and the option to overspend. But, the reality is that if you practice responsible money management and you choose a credit card that works for you, a credit card will provide you with more benefits than troubles. Read on as we debunk three common credit card myths.
Fear: You’ll Live Beyond Your Means
Having a credit card gives you access to purchasing power, which makes some people nervous that they’ll overspend. And while living beyond your means is certainly unwise, simply getting a credit card doesn’t mean you’ll automatically begin spending too much money. In fact, your credit card can help you save money if you spend wisely and practice smart repayment habits — especially if your credit card lets you earn cash rewards.
Solution: Charge Ongoing Expenses Instead
To avoid overspending, don’t buy things with your credit card that you haven’t budgeted for. Instead, practice smart credit card usage and reduce the likelihood you’ll get carried away. This includes charging ongoing expenses only, such as your cell phone bill or your weekly fill-up at the gas station. Using your credit card for these routine purchases or automated payments for expenses you already have funds set aside to cover in your checking account, you’ll avoid “surprise” statement balances that include smaller, unplanned purchases you forgot about. Plus, sticking to your budget will allow you to pay your statement balance in full and on time, which are two of the most important things you can do to build excellent credit and keep your finances in check.
Fear: You’re Worried About Hurting Your Credit
You’re wise to fear bad credit because it can negatively affect your finances, among other things. A bad credit score can sometimes prevent you not only from getting approved for a loan, but also from renting an apartment or landing a new job.
While you may see a dip in your credit score after you open a new line of credit, such as a credit card, using a credit card wisely can ultimately lead to positive impacts on your credit.
Solution: Practice Smart Repayment Habits
Payment history accounts for 35% of your credit score. So, if you stick to only necessary spending with your credit card and make your payments on time each month, you may see an increase in your score. A higher score allows potential lenders to view you as a more reliable borrower, which can help you in the future when you apply for auto loans or mortgages.
After on-time payments, the next most heavily weighted factor in determining your credit score is amount owed. It accounts for another 30% of your credit score, so paying your statement balance in full every month is another way to help build healthy credit.
Fear: The Interest Rate Will Be Too High
High interest rates are one reason you may worry about getting a credit card, especially if you plan to use it for a large purchase you can’t afford to pay up front or are planning to carry a balance for any reason. High interest rates can cancel out rewards offered by credit cards if you’re not careful, but fortunately, you’re in control of which credit card you choose and what balance you carry in order to minimize the impact of interest on your finances.
Solution: Choose a Credit Card That Fits Your Needs, Especially if You’re Planning to Carry a Balance
Sometimes it’s not possible to pay off your credit card each month – something unexpected may come up that drains your emergency savings or you’re working to pay down debt. That’s why it’s so important to shop around and choose a credit card with a low interest rate, even after the introductory period. Outside of interest rates, you’ll want to consider other factors, like balance transfer offers if you’re looking to pay down debt.
At PSECU we offer two credit cards that can help you meet your goals, whether you’re focused on earning rewards or paying down debt. To learn how a PSECU credit card can help you, explore your options today.