by Emily Hechler 
Many people find financial freedom by using a credit card everyday, while others achieve peace of mind by not using a credit card. So, what is the right way to use a credit card? What are the wrong ways? How do you even decide which credit card to use? This guide will help you navigate the world of credit cards, give you tips for using them well, and warn you of the mistakes to avoid.
Types of Credit Cards
With so many different types of credit cards available, it can be hard to determine which one is the best option for you. Maybe you discover you need more than one to meet your financial goals. Here is an overview of five common types of credit cards.
Rewards Credit Card
A rewards credit card gives cardholders access to exclusive perks and rewards for various transactions. Many financial institutions offer rewards credit cards with different benefits. If you want a credit card to use for your everyday purchases, a rewards credit card is a great option. With Alltru’s Rewards Visa Credit Card, you earn points for every dollar you spend with the card. You can redeem your points for rewards such as gift cards, travel discounts, merchandise, or cashback. Plus, enjoy no annual fees and a low introductory rate for balance transfers.
Low Rate Credit Card
Each month, you receive a bill for the transactions on your credit card. If you can’t pay the bill in full, you’ll be charged interest for the remaining balance the following month. Many credit cards have high interest rates, but a low rate credit card has a lower than normal interest rate. If you tend to carry a balance month over month, a low rate credit card is a good choice. Alltru’s Low Rate Visa also has no annual fees and a low introductory rate for balance transfers.
Secured Credit Card
A secured credit card is designed for those with a poor or limited credit history. The money in your current checking or savings account secure the funds available for the card. This also means that you can get a lower interest rate. Many credit cards have a minimum credit score requirement, but a secured credit card has a lower credit score requirement. If you’re working to repair your credit, Alltru’s Blue Secure Visa is a good choice, since you’ll have a low interest rate and another chance to rebuild your credit score.
Store Credit Card
Store credit cards are offered by specific retailers and come with perks for using the card at their stores. For example, Costco offers the Costco Anywhere Visa that gives cardholders a percentage back on qualifying purchases at Costco and a lower percentage back on purchases from other retailers. A downside to store credit cards is that the interest rates are usually high. If you decide to open a store credit card, make sure you read the details so you can get the most benefits without the cost.
Charge Credit Card
A charge credit card is a unique type of credit card. While these have no monthly spending limits, you can’t carry a balance over to the next month. You’ll have to pay a large fee if you try. Because of the makeup of these cards, they are typically only available to those with high credit scores and high incomes.
3 Ways Credit Cards Can Help
While credit cards open the door to making possibly unaffordable purchases, it can be easy to rack up credit card debt. When you use a credit card responsibly, you can benefit from the convenience and perks that they offer. Here are a few ways you can benefit from using a credit card.
Improve Your Credit Score
A credit score is a tool that shows lenders how reliable of a borrower you are based on your previous credit history. If you have a low credit score, it may be difficult to be approved for loans. If you are approved, you’ll likely have a high interest rate. On the other hand, a high credit score can open the doors to more products and lower interest rates. By making at least the minimum payment on your credit card bill on time each month, you can help improve your credit score over time.
Get Paid Back
Many credit cards come with rewards systems. Over time, you can earn points for rewards, merchandise, or cash back on purchases. You can use these benefits for purchases you would have made anyway but instead get them for free. Or, you can treat yourself to stretch your budget a little father. Points and rewards may expire after some time with certain credit cards. Be sure to read the details of the rewards system before signing up for a credit card.
Fund Emergencies
Unexpected situations can leave you in a pinch for funds. Most of us don’t have a fully funded emergency account which is three to six months’ worth of your regular expenses. If this is you, you can use your credit card to pay for the situation when it happens. This way, you can focus on recovering from the situation in the moment and pay off the expense over time. You may even have enough in your emergency fund to cover the entire credit card bill. A few weeks ago, I had a several hundred-dollar expense that I didn’t anticipate. Because I only had a small balance on my credit card that month, I was able to use the card to cover the gap. Fortunately, I had money in my emergency fund that I used when the bill arrived and paid the balance in full.
Credit Card Mistakes
Credit cards are great financial tools when you use them wisely. Not knowing the common pitfalls of credit cards can cause a lot of harm to your short-term and long-term finances. Mistakes can lower your credit score or leave you in a pile of credit card debt that will take months or even years to escape. Unfortunately, experienced credit card users can still become the victim of these mistakes. Whether you’re applying for your first or fifth credit card, here are common credit card mistakes to avoid.
Maxing Out Your Card
By maxing out your credit card each month, you can damage your credit score. This is true regardless of whether you make your minimum payments on time. A good rule of thumb is to keep your credit utilization at 30% or less. For example, if your credit limit is $10,000, aim to keep your balance below $3,000. This will help maintain a healthy credit score. You’ll also have wiggle room in case of an emergency too.
Missing Credit Card Payments
Did you know that your payment history accounts for 35% of your credit score? That’s a large portion. This means that every late, missed, or less than the minimum payment can significantly lower your credit score. Payments that aren’t made on time can also cause your interest rate to increase. These habits can cause your credit card provider to raise your interest rate in addition to charging you late fees. Set up automatic payments or reminders to avoid missing due dates.
Cancelling Your Card
Once you’ve paid your full credit card balance, it can be tempting to cancel it altogether. This is especially true if just paid off substantial credit card debt. However, this can damage your credit score. A portion of your credit score is determined by the amount of available credit you have and the length of credit history. The longer you have a credit line, and the more you have available, the better your score will be. Just because you have your credit card, you don’t have to use it! Instead of cancelling the card, keep it open and use it occasionally for small purchases to maintain a healthy credit profile.
Store Credit Cards
One of the benefits of store credit cards is that you can get exclusive perks at your favorite stores. However, too many credit cards make it easier for you to fall into credit card debt and reduce your credit score. If you’re considering opening a store credit card, ask yourself these questions first. These will help you determine if the card is question is the right choice for you.
Why Am I Applying for This Credit Card?
When considering a store credit card, try to weigh the reasons why you are applying for the card. Discounts and cashback from your favorite retailers are great in theory. However, having too many of these cards makes the benefits hard to keep track of. It can also make it easier to creep into substantial credit card debt. Carefully consider how often you shop at the store and whether the rewards are worth it.
Will I Feel the Earn and Burn?
The earn and burn describes the process of earning points at the cost of feeling the burn of high interest rates and credit card debt. By having a store credit card with great benefits, it can be easy to overspend for the sake of earning points. In reality, you’ll have to pay high interest fees for purchases you probably didn’t need anyway. Before applying for a store credit card, carefully consider the self-discipline you’ll need to stick to your budget. If you’ve proven to yourself that you can manage the payments, a store credit card can be a good option.
Are the Perks Worth It?
Some card perks are more difficult to earn than they appear at first glance. It may take an entire year to earn enough points… to redeem $10 off. Read the disclaimers to learn what purchases earn you rewards and how long the rewards last before they expire. You might not be able to earn enough points fast enough to make a meaningful impact. In that case, the card probably isn’t worth it.
Can You Find a Better Option?
Many cashiers will offer you a store credit card during your purchase, promising a certain percentage off your first purchase. While this deal is enticing, a credit card from your credit union may be the better option. With our Rewards Visa, you can earn a plethora of points with various redemption options. Our Low-Rate Visa likely has a lower rate than the store credit card you’re considering, which can make or break your budget if you’ll carry a balance into the next month. Make sure to research the best credit card option for your situation before applying for one, whether it’s with us or through your favorite retailer.
Paying Your Bills with a Credit Card
Credit cards can be convenient tools to paying your bills each month. Since you can earn rewards with many credit cards, why would you not pay with a credit card? Here are some positive and negative effects to look out for when paying with a credit card. Keep these in mind when you make your next bill payment to determine if you should use a credit card. You may be better off choosing an alternative such as a debit card or have the funds pulled directly from your checking account.
Automatic Monthly Payments
A pro of using a credit card for your bills is that you can likely set up automatic payments/ This takes some of the hassle out of remembering to make a payment. Plus, your payment should always arrive on time. However, you can likely set up automatic payments with a credit card too.
Build Your Credit
By using a credit card for your bills, you can help build your credit. This only works if you make the minimum monthly payment on time, every time.
Prompt Payments
Mailing a check to pay for a bill puts you at risk of making a late payment. With a credit card, your payment will be processed almost instantly and usually post within a couple of business days. You can also eliminate the fear of your bill getting lost in the mail. These perks are also true for debit cards or linking your checking account to the bill provider too.
Extra Fees
Some service providers charge an extra cost for paying your bill with a credit card. Carefully read your payment options to find if you’ll be charged an extra fee. You may be better choosing an alternative payment method like a check or linking your checking account to the bill provider.
Limited Credit Utilization
If you rely on your credit card for many purchases throughout the month or have some credit card debt, paying your bills with a credit card can make it worse. To be able to charge a bill for a credit card, you’ll have to make sure you have enough room on the card. Using an alternative payment method may be the better option if this is a concern.
Potential Interest Charges
To avoid interest fees, you’ll have to pay your full card balance at the end of each month. If you use your credit card for other purchases throughout the month, you might not have the funds saved to pay the full balance. This will result in being charged interest for whatever balance remains on your card. however, this can be avoided if you use a different payment method.
Spend Wisely
Credit cards come with many perks, which make them great financial tools. With so many options to choose from, applying for the best credit card for your financial situation is crucial. Using a rewards credit card can help you earn monetary value in return for using your card. Low rate credit cards are great for those who tend to carry a balance. A secured credit card is backed by your personal funds, which can help you secure a low interest rate. Many store credit cards and charge cards can give you exclusive perks if you use them well. Whichever card you choose, be careful not to fall for the common mistakes. When you are ready to apply for a credit card, start at Alltru. If you don’t know which one is the best option for you, we’ll help you decide!
