Pitfalls Of Using Credit Cards

Financial advisors and planners always recommend using credit cards as a tool to help you establish and build your credit history. Unfortunately, many have to also help people out of undesirable situations because they did not use credit properly and lived beyond their means.

Credit cards are extremely common these days. Just about every person in the United States who is of the appropriate legal age has some kind of credit card. This might be an international credit card or a store credit card but the vast majority of American consumers (and more than likely a comparable number of international consumers) possess and actively use at least one credit card.

As a matter of fact, in the United States, the average credit card holder typically has 3 or 4 active cards at any one given time. For those who are responsible and can juggle this responsibility with ease, this is not a problem, but there are people who find this kind of thing extremely difficult and for this people credit cards can be a major burden.

Credit Is A Tool

The unfortunate reality about credit is that it makes life easier but you have to really know how to use it and most people aren't really taught how to understand and plan to use credit wisely. In fact, many people are kind of thrown into a credit situation before they are really ready for it. If you can adjust, you will be able to use credit as a tool.

When you use credit as a tool you build a good reputation for your actions and it lets banks and other creditors that you are a wise investment for them. This allows you to be able to purchase bigger and better things with more and more credit. As your credit improves you can:

• Get an auto loan
• Get a mortgage
• Refinance your mortgage
• Apply for bigger credit limits
• Get other private loans for a variety of different things

Credit Is A Risk

What many people do not learn until it is too late that credit cards carry a great risk. Even if you only have a small credit card the risk is heavy for you because your credit limit is usually based on your income. Credit card companies do this to ensure they do not lose out if you are not able to pay your bills.

That said, when you take out a small loan or credit limit, say $500, and you are only able to make the minimum payment every month, you are risking the remaining amount in the event that you cannot make your payments. If your minimum payment is $25, for example, you carry a risk of $475 (plus the accrued interest) until you make your next payment. If your interest rate is high, your original $500 purchase can quickly become a $700+ investment if you continuously make the minimum payment, even if you are never late.

How To Think About Credit

The proper way to think about credit is to use it not to buy things that you cannot afford, but instead to use it in place of cash to purchase things that you actually can afford. For example, use credit cards to:

• Purchase groceries
• Purchase gas
• Pay your cell phone bill
• Pay your utility bill

When you do this you can then pay off your balance at the end of every month with the money you have already budgeted for your life expenses.

The Benefits Of Responsible Credit

As you follow this guideline you will find that you are rarely using credit for anything other than things you use every day. What will happen, though, is that you will have established a positive credit history which has many awesome benefits. This includes:

• Reward points
• Frequent flyer miles
• Rebates
• Better credit offers
• Higher credit limits
• Lower interest rates

Depending on the type of card you have there is a great big world of auxiliary benefits available to you.

Conclusion

Using credit wisely is very important and can help you immensely in the long run. Not understanding the proper use of credit, though, can have proportionally negative results that could affect your financial prospects for many years.