Do you really want to know how a credit card works? So many people know the disadvantages associated with a credit card, but still continue to run up their credit. They spend and accumulate what I like to call “negative interest”. I am not complete against credit card because their are many perks to having one. When a credit card is in the right hands it can work to your advantage. Extensive knowledge, discipline and emergency cash allows you to do things which would take years to accomplish.
Build credit
When applying for a credit you must acknowledge the pluses and minuses of a credit card. When used correctly a credit card can be used to build credit. Most financial experts recommend keeping your balance within 30-33% in order to have a positive affect on your report. The longer you have credit the more attractive you become to lenders. Of course, their is more to formula than having a long credit history.
Make payments
When you purchase items on credit you do not have to make upfront payments. When you purchase a credit card you do not have to pay the balance in full at the end of the month with most credit cards. Credit card payment are usually affordable depending on your limit, but do not fall in love with minimum payment. Interest accrued on a credit card is not the same interest accrued on a debit card.
Available funds
When using a debit card you must make sure you have the available funds, otherwise you will incur an overdraft fee. When you have a credit card you can spend up to and slightly over your limit. Now if you are making a wise purchase such as purchasing an investment with your credit card then you should proceed with caution, but it is a step in the right direction. Learning to use your credit card for investments is a good way to build your profile and learn the ins and outs of a credit card.
Emergency funds
If you have an emergency fund with cash and have a high limit with your credit card it is a good idea to create “credit card account”. When you have a credit card make sure you build a bank account/savings account dedicated to match the limit of the credit card. When you make a purchase on credit you will be able to make payments on time. Always remember to replenish what you spend otherwise you will find yourself in trouble.
How a credit card works should be explored with caution. Experiment with a low spending limit. Good luck!