In the modern economy, a credit card is an extremely powerful tool. The ability to be able to spend money and pay it back at a later date, in essence the idea of financial credit, is one of the most important and innovative economic advancements in history. Credit cards allow people with modest means to make large purchases, such as cars, TVs or sound systems, and pay for them incrementally rather than upfront all at once. However, users of credit cards can easily get into trouble if they spend beyond their financial means, particularly if they use their cards for irresponsible purchases. Here are a few situations where using a credit card is an excellent idea — and a few where the card shouldn’t be exiting the wallet!
DO: Use Credit Cards for Small, Regular Purchases
Credit cards are useful for large purchases and expensive items, but they are also important as the main way that most people build credit. By using credit cards regularly for small, necessary payments, like filling a car up with gas or paying a cell phone bill, people can pay their card balances down promptly and demonstrate to future creditors or loan officials that they have an excellent credit history. Having a record of paying balances in full, and in a timely fashion, can be the difference between an excellent and a poor rate on a mortgage agreement, or an affordable rate and an exorbitant rate on a future credit card.
DON’T: Use Credit Cards for Small, Trivial Purchases
Using a credit card for several purchases a day is alluring, because swiping a card doesn’t truly feel like spending money. Credit cards should not be used to buy small, unnecessary items like chips from the corner store or a new video game. When cards are regularly used to make small purchases, the monthly bill total always comes as a bit of a shock: small purchases don’t always cement themselves in our brains, and it can be surprisingly easy to rack up $200 extra a month that wasn’t originally budgeted for. Tracking credit card purchases is important for people who want to remain vigilant about their finances, and spending small amounts infrequently make effective tracking much more difficult.
DO: Use Credit Cards for Large, Responsible Purchases
Very few people can afford to pay out of pocket for large items like a car or a refrigerator. Credit cards are useful tools to have in situations where expensive items are necessary purchases; cars transport people to work, refrigerators preserve food, and no one reliant on either item can survive long without one! For a person with a reliable paycheck, responsible spending habits, and good to decent credit, buying items with a credit card should be no big deal. Of course, these large purchases require detailed budgeting skills and saving ability — having financial wherewithal is an important precursor to making ambitious purchases.
DON’T: Use Credit Cards For Frivolous or Overly Expensive Purchases
Small, repeated ill-advised purchases on a credit card can lead to some uncomfortable checkbook balancing, but large purchases on credit cards are typically what get people into serious credit card debt and potential insolvency. Purchasing big-ticket items without a stable income, purchasing items out of a particular income’s price range, or even purchasing overpriced or easily damaged items can get credit users into serious financial trouble.
Credit cards are a powerful tool, but with great power comes great responsibility. Bad credit can stain a person’s financial reputation for years, and credit card debt can stifle savings accounts and delay big purchases such as homes or cars. Recognizing the power of a credit card to create or destroy is the first step to responsible usage. Setting a household budget, restricting spending to regular, safe purchases, and regularly going over the household’s finances are all good financial habits that will set credit card users up for future financial success.