When You Should Use Your Credit Card And When You Should Avoid It

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Credit cards are often a necessary evil. We need them for various reasons, including the fact that many things in life are not possible without a credit card. For example, if you need to rent a car, you need a credit card. Sure, you can do it with a debit card, but the funds the rental company hold for several weeks until your car is returned, cleared and then the timeframe expires can put a damper on your financial situation. Many hold as much as $200 and that can be for several weeks depending on the length of your rental. The same goes for hotels. You can book them without a credit card, but the holds and fees put many people in a financial bind. If you’re going to apply for a credit card to use in your everyday dealings, you should consider a few things. Knowing what makes a card worth it and what does not make a card worth it is going to save you significantly, and make it possible for you to reap the most rewards, benefits and bonuses available. Remember that not everything is really as good as it looks on the application.

Credit Cards Are Worth it When:

You Pay The Credit Card In Full Each Month

When you pay off your credit card in full each month, your it is absolutely worth it. Why? Because you are making the most of your credit card and using it wisely, and that’s going to pay off substantially. By paying off your credit card balance in full each month you avoid paying interest charges that can cost you hundreds, if not thousands of dollars each year in fees. You make every single purchase more expensive when you use your credit card and do not pay it off in full each month.

You Use Your Credit Card To The Max

This has a lot to do with using your credit cards and paying them off each month. The more you spend, the more you earn. If your credit card has excellent rewards, such as cash back or amazing travel rewards, you will find that using your credit card to pay for every single thing you buy or pay for each month – including your monthly expenses and bills – is going to benefit you greatly. You will earn points for paying your mortgage with your credit card, but you do have to use the cash you would have paid for those things to pay off your credit card in full at the end of the month.

You Redeem Credit Card Rewards Points

Using your credit card frequently and paying it off every month means you will earn lots and lots of points you can redeem on amazing things. This could be free airline travel, free hotel rooms or cash back. If you have a credit card that offers you 2% cash back on everything you spend and you spend $5000 a month on that card, you’re earning $100 cash back every single month. That means you’ll save $1,200 per year using your card. That’s a lot of money.

You Need to Reserve Something

It’s far less expensive to reserve a hotel room or rental car with a credit card than it is with a debit card or cash, so this is going to benefit you greatly. Sometimes it’s difficult for consumers to afford the many fees and holds that are placed on their bank accounts when they use their debit card. If a hotel charges a $50 per night hold on your debit card for 4 nights, that’s $200. If you have a rental car on that trip and the hold fee is $200, you’re out $400 for the time being. It could take as many as two weeks AFTER your trip is over for those holds to be released and those funds are made available in your account again.

You Have an Emergency

You should have an emergency savings account for this purpose. However, if you do not, a credit card can help you tremendously. You never know when you might have to pay a large fee for going to the hospital to pay your deductible or if there is a death in the family and you have to travel unexpectedly. A card can be worth it in times like these.

Credit Cards are Not Worth it When:

When A Vendor Charges A Fee For Using A Credit Card

Charge everything to your credit card just to get the points, right? Wrong! If someone charges you a fee for paying via credit card, you need to figure out if the fee exceeds the value of the rewards points or cash back you would receive on the card. A good rule of thumb to follow is that if the fee is equal to or greater than 1% of the purchase, you should not use your credit card. If you do, you are essentially paying for rewards points instead of getting them for free.

You Don’t Pay Them in Full

Interest, interest, interest. If you are paying no more than the minimum amount due each month, or even if you are paying more than that, you’re being charged excessive fees that will make everything you buy all that much more expensive. It’s just not worth it to pay so much more for things you shouldn’t have to pay more for.

You Abuse Them

If you max out your cards knowing you can’t afford to pay off what you bought, you’re going to be in a big bind. Even if you do pay the minimum amount due each month, you will still find that you are paying so much in interest that you will spend many years paying off those cards, and for much more than you ever actually spent. Your credit score will lower because your debt to income ratio is out of your favor and you will have a more difficult time getting good interest rates on loans and other cards.

You Have a High Interest Credit Card

Here’s the deal with this; if you pay it off in full each month, the interest rate does not matter one bit. But if you don’t, you will find that this card is not worth it. Did you realize that a card with a 25.99% interest rate is charging you a solid QUARTER of everything you spend? That’s like spending and extra $25 every time you make a $100 purchase on your card if you do not pay it off in full.

When Rewards are Difficult

Be very careful with cards that offer rewards that are difficult to redeem. In fact, look for credit cards that do not rely on blackout dates. For example, even if you pay off your card in full each month, it’s not worth it to have one that uses blackout dates and other restrictions when you book your free ‘reward’ travel. Many airlines, for example, only have so many seats per flight that are redeemable for free reward travel, and you might not be able to use it for many of your travels because it does not apply to your time frame, your destination or even your price range.

Photo by Tim Boyle/Getty Images

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