By Anna Davies
Credit cards can be an important financial tool. But if you've never carried a credit card before, you may have a difficult time deciding when and where you should apply. Whether you're setting out for college, considering a large purchase, or thinking about applying for a mortgage, here are times when having a credit card may help you manage your finances.
If you're actively budgeting each month, tracking expenses can be easier when you use a credit card. Consider using your credit card with a similar mindset as when you use your debit card and you may avoid spending more than you can afford to repay. Making a habit of saving receipts and checking your credit card balance once a week can help you keep track of what you've spent.
Many cards offer reward programs, including cash back on purchases, airline miles redeemable for travel discounts, or savings on gas, groceries, and other everyday purchases. Credit card holders who typically pay their statement balances in full and on time are most likely to earn the biggest rewards, so if you're a disciplined spender and budgeter, exploring a rewards credit card may be beneficial.
"Using a credit card for air miles or rebates works well if you pay your balance off in full each month," says Jay Schurman, a financial planner at Lincoln Financial Advisors in San Ramon, CA. But it's not always optimal to sign up for every reward card offer you receive. "You don't need more than one or two credit cards," says Schurman. "Choose the one that offers the best reward for your lifestyle choices."
Before you apply for a card, experts suggest taking a look at your last few months of purchases — if travel isn't a frequent expense but groceries and gas are, it may make sense to consider a card that offers cash back on purchases, rather than a travel-exclusive card. And no matter which reward card you choose, it can be smart to use those points to shop through your credit card rewards mall, which may allow you to buy gift cards, travel experiences, or products directly with the points you have accrued.
Travel rewards credit cards can help cardholders earn benefits, but they can also protect members during trips. For example, using a travel rewards credit card may mean that you don't need to carry a large sum of cash when you reach your destination. In addition, your credit card issuer may also help if you lose your credit card or find that you were erroneously charged for a service. Reduced or waived checked bag fees, and other features can help protect cardholders and make travel more affordable.
While it's a smart habit to pay off your credit card balance in full each month, there are times when you may have a large or unexpected expense. A credit card can give you the ability to pay it off over time. Plus, because some credit cards offer damage or theft protection, you may rest easier knowing that your issuer has your back in case you have a problem later.
Before applying, make sure you have a plan in place to pay the bill in full. Consider a credit card that offers a low or promotional interest rate so you can minimize the amount you pay in interest rate charges, and read the terms and conditions carefully. Always pay your bill on time, since late payments can increase your interest rate and result in late fees.
College can be a great time to begin to build your credit history, as one aspect of your credit score is the length of time you've maintained an open account. "Building a good credit score comes from a responsible pattern of using credit," says Xavier Epps, owner of XNE Financial Advising, a Washington DC financial advisory firm.
If you've never had a credit card before, consider applying for a secured credit card. With a secured credit card, you'll pay a security deposit to access a credit line, but unlike a prepaid credit card, usage is reported to credit bureaus and may help establish credit. Once you have your card, consider setting it up to pay one recurrent bill — such as your phone bill or internet connection — and automate your credit card payment so you pay the balance in full each month.
For the right customer, a first credit card can help build credit history, and that can establish a sound foundation for bigger loans such as car loans and home loans. Many times, loan applicants with excellent credit scores and a strong borrowing history earn the lowest interest rates — and that may help save money. Support your effort to build excellent credit by always following the terms and conditions of your cardholder agreement, and by paying your statement on time and in full. As you gain credibility as a borrower, you'll find lenders may be more receptive when it's time to make the purchases that really count.
Anna Davies has written for The New York Times, Glamour, Marie Claire, Men's Health, Women's Health, Refinery29, and others.