While we definitely don’t recommend overusing credit, a credit card can be a really useful tool in your credit arsenal if you know how to use it properly. It can help you positively build your credit history, give you rewards like cash back when you use it, and help protect your money better than a debit card.
If you’re on the fence about getting a new credit card, here are three reasons to help convince you to get new plastic and put it to good use.
1. To Build Your Credit History
Your credit payment history factors heavily into that three-digit number called your credit score. Using a credit card and paying it off on time every month will keep your payment history positive and show lenders that you are creditworthy and less likely to default on payments. Additionally, having both installment loans, like student loans, and revolving credit, like credit cards, on your credit report shows you can manage and balance various types of credit. This factor of your credit personality will come in handy when you’re ready to apply for more credit, like a home mortgage.
However, keep in mind that just one late payment can devastate your credit score. Set up email or mobile alerts with your bank to remind yourself when it’s time to pay off your credit card each month, so you don’t ever miss a payment.
2. To Earn More While You Spend
Several credit cards offer rewards, from cash back to airline miles, that help you earn more while spending on your usual purchases. We recommend using a cash back rewards card because cash rewards card earn more than most other credit cards. Make the cash rewards work toward purchases you’re already making, so you maximize your earning and you aren’t tempted to overspend and land yourself in debt. For instance, if your card offers 5% cash back on travel purchases during the summer months, use your cash back card to book your plane ticket and hotel. That 5% will go a long way when making those big purchases.
3. To Safeguard Your Bank Account
Thanks to Regulation Z, a cardholder’s liability for unauthorized use of a credit card is capped at $50 or the amount of the fraudulent purchase, whichever is less. Meaning, if your credit card is stolen and your card takes on several hundreds of dollars in fraudulent charges, you’re only obligated to pay as much as $50. If the fraud involves the unauthorized use of a cardholder’s credit card number, but not the physical card, the cardholder won’t be liable at all for any fraudulent transactions.
Regulation E, for debit cards, is not so consumer friendly. If your debit card is stolen and used, you’re only liable for $50 of the charges if you notify your bank within two days. If you notify your bank later, the amount you’re liable for could exceed $500. Some banks have zero liability, but either way, the fraudulent charges will remain on your debit card while the fraud is investigated.
Additionally, if your debit card is overcharged and you don’t have overdraft protection with your bank, you are susceptible to overdraft fees. On the other hand, if your credit card limit is reached, the card will be declined and the thief can’t use it further.
Bottom Line: A credit card can be very useful when it comes to establishing and building your credit, getting cash back rewards, and safeguarding your money. But before you apply for a new credit card, make sure you read all of the card’s terms and conditions. Find the card that best suits your lifestyle and personality.
And most importantly, make sure you’re following the two cardinal rules of credit cards to keep your credit in check: never let your credit card utilization rate rise above 30% of your available credit limits, and always pay your statement on time.
Credit Karma™ is a completely free credit management service that provides free credit scores, personalized savings recommendations, and financial education. We believe free access to one’s credit score is a fundamental consumer right. Credit Karma helps more than 2.4 million consumers realize the everyday cost savings of having a good credit score. Visit us at www.CreditKarma.com.
Published or updated April 21, 2011.