Many people hold misconceptions about credit cards. Do You?
It’s common for many people to assume Credit cards are financially dangerous… and they can be.
The reality is credit cards are incredibly useful.
However, before you start using your credit cards, you need to develop some responsible financial habits.
If you misuse credit cards you’ll certainly face significant problems. You could face high fees and penalties. And overspending could create years of debt payments.
That said, using credit cards can offer many benefits.
What Is a Credit Card?
A credit card is a lending contract.
A lender (the credit card company) provides a credit card to a borrower. The credit card has a limit on how much can be spent and an interest rate the borrower must pay. The borrower uses the card to buy things, and repays what they spend at a later date.
The physical credit card allows the borrower to make purchases easily in a store and online… even over the phone.
The golden rule of credit cards is you repay what you spend. Every credit card has unique terms and conditions. Review these carefully before applying for or using a credit card!
Here’s a few terms to be aware of…
What Is a Minimum Payment?
When you use your credit card, you create a balance. A Minimum payment is the amount you must pay toward your balance, every month.
Some credit cards offer introductory periods where you do not have to make a payment at all. It sounds great, but beware of the details. These cards will often change to different terms (higher interest rates) after introductory periods end.
Other credit cards offer very low monthly payments. However, these cards often accrue interest quickly.
Here’s a hot tip… pay more than your minimum due. Depending on your balance, the minimum payment may only cover the interest expense. Minimum payments may not pay down the principal on your credit card… and that means you’ll be paying the credit card company FOREVER!
Another important credit card term is credit limits.
What Is Credit Limit? 
A credit limit is the maximum you can spend with a credit card. A card with a $10,000 limit allows spending up to $10,000.
If you try to spend more, your card may be declined.
If you make payments on time, have good spending habits, or if your income goes up, you might see your credit limit increase.
If you want to increase your credit limit, all you have to do is call up your credit card company and ask. You will need to give them specific information for approval, like your income, other debt, and they might do an additional credit check.
Why Use a Credit Card?
Credit cards are a type of financing. When you abide by financing terms, you build good credit. This, in turn, helps you qualify for new financing in the future… to buy things like cars and homes! There are rumors, good credit may even help lower insurance rates!
Using credit cards offers many potential advantages, including:
1. Emergency funds when you need them most.
2. The ability to make larger purchases than your checking account would allow.
3. Flexibility to repay your spending over time.
4. The opportunity to build your credit history.
5. Benefits like points, cash back, or other rewards.
6. The ability to put some bills on autopay with credit cards.
7. Often you need a credit card to rent a car!
8. Opportunities to increase credit limit with good payment history.
9. Refinancing options for better credit cards in the future.
These are just a few reasons to consider credit cards. I know some people are apprehensive about taking on debt. Just remember, as long as you make payments on time, credit cards can be a key tool in your personal finance toolbox.
Who Should Use a Credit Card?
I think EVERYONE should have a credit card – it allows you to buy things online, plus, it can be a financial safety net. Virtually anyone can obtain a credit card and benefit from using it.
Credit cards also help build credit – so if you want to make a bigger purchase in the future (like a car or house) a Credit card is a great way to prove you are a responsible buyer.
Students really benefit from safely using credit cards.
Students can use credit cards for everyday expenses, books, tuition, travel, housing and much much more.
I know business people who have used credit cards to start businesses, and manage expenses!
Anyone who wants good credit should have at least one credit card. Most experts say adults with established careers can have five or more credit cards – but that sounds like a lot! Being careful with budgeting and spending is essential if you’re using multiple credit cards.
Some of the people who benefit most from credit cards include:
- Parents. Credit cards can help with childcare expenses and everyday purchases.
- Business people. Using a credit card for expenses makes keeping business records easier.
- Students. Students with limited income can have financial flexibility using credit cards.
- Independent contractors. Credit cards make it easier to track expenses for billing clients.
- Travelers. Most credit cards can be used worldwide.
If you are interested in credit cards, review your options carefully. Every card has different terms and conditions – so make sure to find the one that’s best for you!.
You may want to consult a financial advisor (If you have one). They can review your situation and provide individualized advice on choosing the best credit cards.
However, I know many people who simply started with a credit card from their bank… after using it for a while, they then looked for other credit cards to better suit their needs.
When to Get a Credit Card
Credit cards help build good credit history. Therefore, it’s best to obtain one as soon as possible. This is why credit cards for students are a good idea.
Yes, even high school students should get a credit card – if they are responsible.
Students with limited credit history can build good credit using credit cards. Managing monthly payments is easier with limited income. Students can also build good budgeting habits with their credit cards.
New parents may also want to consider credit cards. Their credit cards can help with early childcare expenses. It will help in building credit history…which means better rates when it’s time to buy a house or car!
If you have good credit, you can enhance it with new cards. Adding a new card will improve your credit score. This can be true even if you carry balances on old cards.
But as a rule, I would not get another credit card until your others are paid off… otherwise you’re just asking for trouble.
Benefits of Using Credit Cards 
Remember that a credit card is a lending contract. Lenders extend credit, and borrowers agree to their terms and conditions.
1. When you use credit cards correctly, you can enjoy many advantages:
2. Your credit limit can allow for large purchases you otherwise couldn’t afford. Instead of paying all at once, you repay gradually over time.
3. Many credit cards offer bonuses. Cash-back rewards offer cash rebates on specific purchases. Other cards offer points-based rewards systems.
4. Credit cards can be used almost anywhere. If you travel a lot, credit cards make spending easier.
5. You can easily track your spending. Credit card companies offer useful apps and other tools. Use these to keep track of payment due dates and more.
6. Credit cards are ideal for online purchases. If you shop online, you can save card details for easier purchasing.
7. Good credit history will enable you to qualify for financing later. For example, qualifying for a car loan or home loan requires good credit. Credit cards offer many benefits when used correctly.
If you want the best card for you, evaluate your options carefully. Every credit card comes with unique terms and conditions.
Drawbacks of Credit Cards
Credit cards provide many advantages. However, there are some drawbacks to credit cards. Remember, most drawbacks occur when you fail to make payments on time, or get overextended.
So rule #1 is don’t spend more than you can afford.
And rule #2 is to always make your payments in full, and on time!
Before using a credit card, It’s important to carefully consider the credit card terms.
One of the most important factors is annual percentage rate (APR). This is the fee you pay for the privilege of using the credit card. High APR means paying more in interest than a low APR card.
Some credit cards also have difficult fee schedules. For example, some charge a fee if your payment is even one day late. Others charge a fee if you take cash out. Others charge a fee for foreign currency transactions. Carefully look at a credit card’s fees before signing up or using a credit card.
Make sure the card’s terms suit your intended use for the card.
Credit cards will also come with some penalty terms. Penalties accrue when you do not make payments on time. Additionally, interest accumulates faster.
Penalties make it harder to pay off credit cards quickly. They can also hurt your credit score.
Over time, too many credit card penalties damage your credit. Lenders won’t want to extend you any further credit.
It’s important to remember how to avoid the drawbacks of credit cards:
- Always make payments on time. Some credit cards offer grace periods, while others do not. Make payments on time to avoid penalties.
- Keep track of automatic payments. If you use credit cards for automatic bills, be careful. Track when these charges happen so you are prepared.
- Pay more than your minimum payments. You can avoid penalties with minimum payments. However, if you carry a balance on your credit card, you will mostly be paying on interest.
- Be careful with large purchases. Some credit cards have specific terms for large purchases – like buying a credit card. You may also incur additional fees if you exceed your credit limit (or the purchase might be declined).
- Don’t sign up for too many credit cards. It’s normal to have several credit cards. However, too many cards can be difficult to manage, and a warning flag to other lenders.
- Pay attention to annual fees. Before signing up for a card, check the annual fee. If there is one, make sure you are comfortable with it.
Hopefully, these tips will help you avoid the drawbacks of credit cards.
How to Compare Credit Cards 
Choosing the right credit cards is important. Different cards are best used for different purposes. Finding the right card will provide several advantages.
Most credit card companies offer several cards. Don’t just look at one company’s cards. Consider options from various creditors. You might even check the credit cards offered by your bank.
You can take better advantage of credit cards by comparing before applying. Some of the criteria you should compare include:
1. APR. Low APR is always best. This means you pay less interest on your purchases. Some credit cards will have introductory APR that changes later…so be careful.
2. Credit limit. A higher credit limit means more purchasing power. However, higher credit may also have stricter terms and conditions.
3. Penalty rules. Make sure you understand what happens if you miss a payment – or are late even one day. Also, look at other potential penalties and how much they cost.
4. Payment terms. Your minimum payment could change over time. Look carefully at the introductory terms and how they might change
5. Bonus programs. Look for things like points systems or cash-back bonuses. Over time these can add up to substantial benefits. You also want to be aware – some credit cards will take away bonuses if you violate their terms!
6. Safety buying things. If you shop online, you’ll want to use a credit card that can help you solve problems with retailers.
7. Insurance programs. Some cards offer insurance on things you buy, or provide additional insurance on rental cars! Research these details Before buying or renting!
8. Purchase restrictions. Some credit cards can only be used for certain purchases. Others cannot be used for certain purchases.
These are things you should consider before applying for a card.
Most credit card applications can be made online! When the company approves your application, you should receive your card quickly – within a few days.
Be careful about using your credit card online. Always verify an online merchant before submitting card details.
Here’s another tip. Never post pictures of your credit cards online. Always keep your credit card hidden, otherwise scammers might try to buy things with your card!
Credit Cards vs. Debit Cards
Many people confuse credit cards with debit cards.
These two types of payment cards are fundamentally different.
A debit card is basically a checking account card. You can only spend what you have available in your checking account. There is often a direct link from your checking account to your debit card.
Debit cards generally do not add interest to your purchases, which makes sense – it’s your money. However, some debit cards do charge fees – so always read your agreement BEFORE using a debit card.
I know many people prefer using debit cards to track their spending more carefully.
As we mentioned earlier, Credit cards are lending agreements. You borrow the money spent from the lender. Lenders charge interest on purchases in exchange for the line of credit.
Debit cards may offer stability, but they have drawbacks, too. They do not help you build credit like credit cards can. You also risk penalties if you overdraw your checking account. Plus, some merchants may not accept debit cards.
Another risk of debit cards is identity theft. If someone steals your debit card, they can drain your checking account. Worse still, it’s hard to dispute charges or get your money back if your debit card gets used fraudulently.
It is possible to have credit cards stolen, too. However, you can call the company to freeze your card. Plus, if you report your credit card being used by some scammer – your liability is limited. The credit card company can’t force you to pay – IF you report fraudulent charges quickly!
As you can see Credit cards and Debit cards both have advantages and disadvantages.
Can a Credit Card Hurt Your Credit?
Credit cards are valuable tools for building good credit. However, they can also hurt your credit. This only happens if you fail to make payments on time. Failure to make payments on credit cards is damaging to your credit. Creditors may even file civil claims to collect unpaid balances.
Credit cards may also hurt your credit if you don’t use them. Having open lines of credit you don’t use doesn’t always benefit you. This can make you look like a higher risk to lenders.
Ultimately, credit cards do not hurt your credit if used correctly.
Credit Cards for Bad Credit
If you have bad credit, you may still qualify for a credit card.
Many credit card companies offer multiple cards, and some are targeted at people with bad credit.
These cards often have strict payment terms, lower limits, and huge fees if you don’t follow the rules.
It’s also possible to find secured credit cards. These function similarly to debit cards. You deposit money with the credit card company. Then, you can only spend what you initially deposit into the account.
It’s not really a credit card, but you prove to the lender you can be responsible with money, and it can help build your credit
It’s like training wheels for credit card users!
Secured credit cards are the most restrictive for those with bad credit.
How to Obtain a Credit Card with Bad Credit
Many credit card companies are willing to approve cards with bad credit. However, they offer limited options, lower limits, and sometimes higher fees.
Try to find a card with reasonable terms and a low APR.
Then it’s as simple as filling out the online application. If your credit card application is rejected, I’d recommend waiting a month or two then trying again.
Make sure to make all your other debt payments on time, and don’t give a lender any reason to send a bad report to the credit bureaus.
Resubmit your application – and maybe look for credit cards specifically designed for those with bad or no credit.
If that doesn’t work, I’d suggest trying a secured credit card with a low credit limit.
Now onto a really interesting question…
What You Should NEVER Buy with a Credit Card
It’s strange to think there are things you shouldn’t buy with a credit card… but there are.
Top of the list is using your credit card for a cash advance.
Most credit card companies will charge you a fee to take out cash, PLUS they start charging you interest right away.
Along those same lines is using credit cards for Bail Bonds. I’ve heard of people getting hit with high fees and interest.
Another strange item not to buy with a credit card is a Car.
I’ve heard most dealerships won’t even take your plastic payment, because they’re worried about chargebacks. Other dealerships will allow you to pay, but won’t allow you to take the car until the credit card company issues the approval.
Plus – all dealers will undoubtedly stick you with an additional fee for using a card.
I’ve also heard that some hospitals and medical related businesses will take a credit card, but then they charge a “processing fee.” Again – fees like this suck!
Ultimately, credit cards offer flexibility. Some people use them as emergency funds. Be careful when using them to avoid penalties and minimize interest.
How to Pay a Credit Card Off Quickly
There are several methods for paying off credit cards quickly.
The first option is paying more than the minimum. Your minimum-required payment may not cover much of your principal (if any at all). Most minimum payments cover only interest. So make the biggest payment you can.
If you have a high-interest card, you may qualify for refinancing. You would essentially transfer your balance to a new card. This new card might have a better interest rate, saving you thousands of dollars as you pay down the credit card bill.
Lowering interest ultimately reduces the total cost of using a credit card.
It’s also wise to pay down one debt at a time. Choose your highest interest rate card and pay more on that card. Once you’ve paid it off, move on to the next card.
Personal finance junkie Dave Ramsey tells people to pay off their smallest credit card balance first.
Regardless of what way you decide to pay off your credit card, a big tip is to STOP adding to the balance.
YES, stop using the credit card you owe money on.
If you struggle with that simple step, it might be time to learn how to set a financial budget!
Is it Good to Have Credit Cards and Not Use Them?
It’s fine to have credit cards and not use them. All things being equal, as long as you make all payments on time, having open credit cards will help your credit score.
Unused credit cards can come in handy in many ways. They can be critical in emergencies. for example, if you unexpectedly lose your job, or have a big medical expense.
Keeping unused credit cards helps to improve your credit score over time. This can help rebuild bad credit.
That said, too much of a good thing can be bad.
When you get a loan, lenders often look at your available credit. If you have 10 credit cards and the limit on each is $10,000… that’s a potential $100,000 in debt you can build up. This excessive “Available Debt” may hurt your ability to get a car loan or home mortgage.
I’ve not been able to find a good rule of thumb for how much available debt you can or should have… but if I do, I’ll let you know.
Special Types of Credit Cards
Did you know there are special kinds of credit cards out there? Most credit card companies offer perks and special rewards programs, so make sure to look into these bonuses:
1. Cash back programs are popular. You could earn cash back in several ways. Flat-rate, tiered bonus, and category bonuses are the most common. Nothing is better than Cold hard cash in your hand!
2. Travel programs are great for those who like adventure. . You can earn airline miles and other discounts by using your card. These cards often have specific bonus restrictions, so read the fine print. I know people who flew to Europe first class on bonus miles!
3. Points systems award points for purchases with your card. You can eventually redeem points for various rewards. Many credit card companies offer gift cards to restaurants, stores, and even for experiences (like movies or amusement parks).
4. Introductory offers provide attractive APR and other benefits. Transferring a balance from one card to another? Some cards will offer lower interest rates and deferred payments. Just remember there’s no free lunch, so read the fine print… often these offers typically only last for a short time.
5. Industry-specific credit cards. Some creditors offer credit cards to specific industry professionals. These cards often offer attractive benefits but have strict purchasing rules. These are great for business credit cards.
6. Merchant-specific credit cards. Some retailers and merchants offer their own credit cards. If you make regular purchases from a merchant, you could earn rewards above and beyond what’s normally offered!
These are just a few examples of special types of cards. There are also credit cards with very high or unlimited credit limits. However, qualifying for these cards is difficult, unless you make big bucks!
Remember to review terms and conditions before signing up for or using any credit card!
Is Closing Credit Cards Bad?
Most people have heard that closing credit cards hurts their credit score. If a lender closes a card, this can certainly reduce the credit score, by reducing their available credit. There is, however, a safe way to close a credit card.
If you have multiple credit cards, you may wish to close one. However, you must understand the credit utilization ratio. This is the credit you have open compared to what you’ve used.
If you close a credit card, this impacts your credit utilization ratio.
Your ratio would only account for other credit lines remaining.
Generally, it’s best to pay off credit cards and leave them open.
There are a few situations when it’s best to close credit cards:
- Divorce. You should cancel shared cards when you divorce. You can also assign sole ownership. This prevents you from being liable for your ex’s debt.
- High fees. If you have a card with high annual fees, consider closing it. Even if you don’t use it, you may be liable for fees.
- Bad spending habits. If you are an impulsive spender, credit cards can be dangerous. Closing a card can help eliminate temptation.
Think carefully before closing a credit card. If the balance is paid off, and it doesn’t have any fees, it’s probably worth keeping. You can always use it in an emergency!
Now one more question before we go…
How Many Credit Cards Should I Have?
Most experts agree the average adult can have five to ten cards. However, just because the “experts” say that, doesn’t mean it’s right for you.
I know a millionaire who has 2 personal credit cards and just 1 for his business. Far less than what the experts say. (maybe that’s why he’s a millionaire?)
you should be selective with credit cards. Try to assign specific purposes to each credit card.
It’s common for younger people to have one or two credit cards. They may use one for regular purchases and the other for emergencies.
Other people use credit cards to take advantage of rewards programs. Review your spending habits. Look for patterns that you could leverage with credit card usage:
- Do you drive a lot? A credit card with rewards for gas purchases may be ideal.
- Are you a frequent flier? An airline credit card may offer discounts on airfare.
- Do you make a particular type of purchase often? Find a card that offers rewards for that type of purchase.
- Do you need to rebuild credit? Look for credit cards with simplified terms and easy qualification.
- Are you planning for a major life event? Find a card with a high credit limit that provides purchasing power.
These are just a few considerations you should make. Remember the golden rule no matter how many you have. You must always pay back what you spend. And don’t forget to make your payments on time.
It’s best to organize your credit cards. Do not simply switch back and forth between cards for different purchases. This will help with record keeping, and to make sure your credit card isn’t used by other people – like scammers.
Do you have other questions about credit cards? If so, let us know, and maybe you’ll see your question published in a future article!