Avoid 3 Common Credit Card Traps
Getting a credit card an easy way to build your credit, but you should still be careful when it comes to spending and swiping. Kimberly Palmer, credit card and banking expert from Nerdwallet, shares some pros and cons of using plastic.
PRO: Credit cards can help build your credit history
“Credit cards are actually one of the simplest and most straightforward ways to build credit,’ Palmer says. “Building your credit history when you’re young is so important because it can really affect so much of what you do in your financial life.”
Showing that you can responsibly handle credit will make it easier for you to take out a loan — for your education, a car, or a new home — down the line. But in order to build a strong credit history, be sure to pay off your bills on time every month.
“The lender you’re considering using will always check your credit history to see how you’ve paid off your bills each month,” Palmer says. “It’s such an important thing to build up [your credit history].”
CON: Late payments can snowball
Palmer cautions credit card users to not see credit cards as “free money.”
“It’s really important to understand that if you don’t pay off the balance at the end of every month, then really quickly fees and interest can accrue and you can end up building up a lot of debt,” she says.
PRO: Rewards and perks
When you sign up for a credit card, Palmer recommends researching all the benefits that come with it. Aside from earning points and getting cash-back deals, there might be other advantages that come with your card.
“Some of the perks that come with credit cards are things like renters’ insurance or car insurance. Some cards come with purchase protection, so if you buy something you can get your money back. There’s also things like fraud protection, which can help you avoid worrying about losing money,” Palmer says.
CON: Leaving money on the table
If you avoid researching the benefits and perks of offered by your card, you could be leaving money on the table, Palmer says.
“Credit cards will reward you for spending on different categories and you want to make sure you’re maximizing that,” Palmer says. “Cards are so different from each other so you first have to really think about how you spend the money because you can actually get rewarded based on how you spend,” she says.
Look for cards that offer the best benefits for the purchases you make. For example, if you use your card for groceries, find cards that offer a high percentage back on those purchases. Or if you want to travel, find a card that offers travel deals or rewards points you can cash in later.
PRO: Using your card as a budgeting tool
Palmer says your credit card can be an easy way to organize your finances and see where your money is going each month.
“Every time you use it, it gets logged on to your account, so you can look up your statement and review where you spent money,” Palmer says. “You can also organize that spending by category so you can see the percentage you’re spending at restaurants or on travel [for example].”
Seeing where you spend can help you determine if you need to cut back. “It’s a really useful way of getting organized with your finances without having to collect receipts,” Palmer says.
CON: The temptation to overspend
Palmer cautions that if people find themselves overusing their cards to pay with cash instead.
“If you really need to exert more self-discipline, and it’s just too tempting to pull out that credit card and spend — even when you know you shouldn’t — that’s a red flag,” Palmer says.