A credit card is a great tool if you pay off your balance in full every month. Some people say that carrying a balance on your credit card from month to month will benefit your credit score, but that is not true. It’s not going to help your credit score. All it would do is charge an interest fee to your balance. So, that’s why never carry a balance from month to month. Using your credit card wisely is important for your financial well-being. It could save you money and prevent financial and emotional hardship.
Be smart about using a credit card
Credit scores are used by lenders. Your score is important whenever you decide to buy a car, house or get a loan for your business. Even landlords and cell-phone service providers often look at it before doing business with you. Building up a credit history is important, but you need to play by the rules so you don’t get in financial trouble. Credit card 101: Pay your balance due in full every month. You don’t want to pay interest while you can simply avoid it. Don’t spend more on your credit card than you can afford to pay at the end of the month. A good approach would be picking a smaller bill to pay with your credit card. It could be Spotify, Netflix or something else that incurs a smaller monthly expense compared to your other bills.
How credit card companies make money
Theoretically, credit card companies lend you money for a month and charge you back at the end of the month. During a month, you buy things that you need and want using their plastic card which has a predetermined limit on it. Then you pay them back once you receive a bill from them with the following options that you have:
- Pay in full
- Pay the minimum due
- Pay any amount above minimum due
Now, bear in mind that credit card companies love when you are not paying your balance due in full. That’s when they charge you an interest fee on an unpaid balance. It’s extremely lucrative for them when you just pay the minimum and start accumulating interest on an unpaid balance. There are few other ways that credit card companies make money, such as over-the-limit fees, late fees, cash advance fees and other fees. The lion’s share of the fees is actually paid by merchants whenever you swipe your card and the rate ranges from 1 to 4 percent per purchase.
What actually happens when I pay only minimum due
It’s the easiest way to get into debt quickly. Also, you’ll be paying more for the things you paid than you intended to due to the interest charged on an unpaid balance. The average credit card APR U.S is 15.59% according to creditcards.com. As you accumulate more in balance, you’ll just be throwing money at the debt that would feel like never going down. Not understanding the negative consequences of paying only the minimum due instead of the full amount can affect you both financially and emotionally. It’s better to prevent it from happening than having a hard time later on. Because dealing with heavy credit card debt is the last thing you want to experience.
You have an emergency situation and you want to charge your credit card even though you can’t afford it. What do you do now?
The answer is still no, you shouldn’t spend more than you can cover. As a matter of fact, you are able to cover that emergency expense on your credit card while you shouldn’t. That could affect you later on with a huge cost. You would think that credit cards exist to cover our expenses in emergency situations, but that’s not exactly true. It comes with its own huge price tag. For emergency situations, you need to build up an emergency fund that we’ll cover in our next few blog posts. Having an emergency fund is important in times of unexpected events that could act as a cushion from getting into debt. If you have no emergency fund and no other options whatsoever to rely on, meaning that your credit card is the only solution for emergencies such as unexpected travel or an ambulance ride, then your card should be charged.
By Rashid Khasanov
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