Ordinarily you’ll see advice on how to avoid using your credit card at all costs. Not only is that unrealistic for most people, it’s also unnecessary if you know the difference between the times you should use your credit card and the times you shouldn’t. As we know, when it comes to swiping there are many credit card costs to be aware of.
When Should You Use Your Credit Card?
If you can manage the balance of your credit card and stay in control of your purchases, then there are plenty of times in your everyday spending that you can benefit from the ease and security of paying with credit. You should use your credit card for:
Everyday purchases within your budget.
When you create a detailed budget you will have outlined the costs of your essential expenses such as fuel, groceries and mortgage or rent payments. Therefore, these costs are ones which you have budgeted for and you know you can afford in your weekly wages so when you use your credit card for these purchases you know you will be able to cover the balance on your card with what is available from your wages. In making your day to day essential purchases on your credit card, you also have the opportunity to leave your wages in a high interest savings account to earn interest while you use the interest free days on your credit card.
Immediate bill payment.
Ensuring the bills you are paying on your credit card are within the budget covered by your wages, you can make fast and immediate payments by credit card for most bills such as your phone, internet, power and water. This means you don’t have to worry that an electronic payment won’t be processed in time as your credit card will be debited immediately, and the funds transferred right away.
Purchase insurance benefits.
If you are making a significant purchase then you can benefit from the added protection of purchase insurance on eligible credit cards. Many credit cards will offer you 90 days of replacement coverage if a purchase you make on your card is lost, damaged or stolen. Your credit card may also offer you an extended warranty on eligible purchases which often extends the manufacturer’s warranty by 12 months.
When Shouldn’t You Use Your Credit Card?
The general rule for spotting the times you shouldn’t pay with credit, is the times when you can’t afford to cover the cost of the purchase. This includes:
To pay other debt.
Most credit cards don’t allow you to pay credit with credit but even if you can process such a transaction you shouldn’t because you clearly can’t manage the debt you have, and shouldn’t add to it. This includes paying for things like lay-bys and purchases made on interest free store credit programs because you are turning an initially financially responsible transaction into bad debt.
An impulse buy is usually something you really want, and don’t really need. This means you are getting into debt for a purchase which has caught your eye in the store, but something you are likely to forget about in a few weeks or a few months. Instead, consider saving up for a purchase which isn’t in your budget this week, and you may find that when you have reached your goal amount you’ll realise the item is frivolous and unnecessary anyway.
If a surcharge applies.
When you use a credit card to pay for anything, the person who takes your payment is charged by your credit card issuer for taking the payment. this is called a merchant fee and on a MasterCard or Visa credit card it is usually around 2% of the transaction cost and the merchant will absorb this cost. However, if you are using a credit card like an American Express, the merchant fees are higher usually around 3-5% of the cost of the transaction and some merchants will pass on the cost of the merchant fees to you. As a result, your purchase can end up being more expensive if you chose to use credit where you are charged a surcharge.
Before you apply for a loan.
If you are in the process of applying for a home loan then you should cease all your credit card activity if possible. This will help you reduce the amount of credit card debt you have to make you a more attractive loan candidate, as well as show less of a reliance on bad debt on your credit history report.
A cash advance.
The cash advance option on your credit card may seem like a way to get you out of a tight spot, but keep in mind cash advances usually attract a higher interest rate than ordinary purchases. Plus, if you are carrying an existing balance, your cash advance won’t be paid off until your older purchases are repaid, meaning you will be charged the higher cash advance rate for longer.
Using a credit card can be a smart way to manage your finances if you know the difference between purchases you should make on your card, and those you shouldn’t. Just remember, when you spend with a credit card, you are using someone else’s money and if you can’t pay it back before they start charging you interest, the purchase probably isn’t worth making because you’ll be paying for it over and over again in interest charges.
This is a guest post by Alban who is a personal finance writer. He provides tips on how to effectively use a credit card and helps people to compare credit cards online.