Credit cards often get a bad rap because of their high interest rates; however, overlooking them means missing out on several valuable benefits. For those who are responsible with their finances, meaning they avoid high-interest debt, follow a budget and live within their means, credit cards are a crucial part of personal finance that should not be skipped. When used effectively, they can provide more opportunities for financial freedom and success.
Main Benefits:
When managed wisely and paid off in full each month, credit cards offer much more than just convenience, including: security, rewards and a path to establishing a robust credit history.
- Protection: Credit cards contain security measures and fraud protection against unauthorized transactions, unlike debit cards.
- Rewards: With strategic planning, credit cards can provide immense benefits. Whether it’s cash back,travel points or miles, sign-on bonuses or perks like free lounge access, finding the right credit card(s) for your goals can help you save extra money.
- Builds Your Credit History: Having a solid credit score is essential when it comes to applying for loans, whether a car, house or business. Utilizing credit cards prudently enables you to build and improve your credit score over time.
How to Pick a Card:
With so many options out there, it can be overwhelming to select the right card. Start by checking your credit score to gauge which cards you are eligible for. Platforms likeCredit Karmaallow you to check your credit score for free. Additionally, access your free credit reports once per year fromAnnualCreditReport.comto check for any inaccuracies and pinpoint how you can improve your score.
Once you understand what cards you will be approved for, consider your goals to determine the benefits that suit you best. If you do not travel often, you may select a cash-back card. If you are loyal to a certain hotel or airline, their branded credit card might make the most sense. If you like to travel but are not loyal to any brand, then consider selecting a general travel card that is not tied to any one travel partner. Only you know the best fit for you.
Risks:
While there are numerous benefits that credit cards provide, it is also important to acknowledge the risks. With annual percentage rates (APRs) often exceeding 20%, failing to pay your statement balance by the due date each month will result in high interest charges and potential damage to your credit score. For this reason, credit cards should only be used when they will be paid off in full every month. Racking up balances can cause long-term harm to your credit score, so make sure you are committed to only spending what you can afford.
If you have a strong financial foundation and are looking for free travel or extra cash with protection against your transactions, then you should not shy away from credit card usage. I have saved tens of thousands of dollars on travel from my credit card points and know that if I lose my card or it is stolen, security measures are in place. Start with one card to get comfortable and from there, your options are limitless!
Extra tip:If you do not plan to apply for new credit soon, consider freezing your credit. A security freeze prevents creditors from pulling your credit report and approving new credit accounts in your name. Setting up a security freeze across all three major credit bureaus -- Experian,Transunion andEquifax-- is a straightforward process that only takes a few minutes of your time and can reduce the risk of identity theft. Remember to ‘schedule a thaw’ on all three websites whenever you plan to apply for new credit cards or loans in the future.
About the author: Haley Ellis, CFP, CPFA
Haley Ellis, CFP®, CPFA® is a Financial Planner & Integrator atAllegiance Financial Group Advisory Servicesin Wilmington, NC. She is passionate about financial empowerment, specifically for women and the next generation, and loves the opportunity to motivate and guide others to take charge of their financial lives. Haley can be reached athaley@afgas.net.
This article was originally posted on June 5, 2024 on TheStreet.
As an advisory representative, Haley Ellis offers advisory services through Allegiance Financial Group Advisory Services, LLC (AFGAS). Securities offered through appropriately registered representatives of the Strategic Financial Alliance, Inc (SFA), member FINRA, SIPC. AFGAS is unaffiliated with SFA. Supervising office: 678.954.4000.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.