3 Ways You Can Use A Credit Card To Improve Your Finances

man holding credit cardsWould you believe it if we told you that your credit card can help you improve your finances?

No we are not affiliates of any credit card company. In fact, we do not dispute the fact that credit cards are part of the top financial problems of Americans – especially for those who are just about to retire. These pre-retirees are currently struggling to pay off their card balances, just as they are having problems with health care costs and low wages. You cannot blame them for worrying about debt at their age because they are running out of time before they are to retire. After all, nobody wants to carry debt into retirement. What little resources you have will have to be shared with your debt and that is not the ideal retirement scenario.

But if you think about it, there are certain benefits to credit cards. You should not be too quick to judge this piece of plastic because there are good things that can result from owning one.

The truth is, the credit card is not to blame for our financial difficulties. It is our own habits that have led to our financial destruction. According to NerdWallet.com, we are a charge happy nation. We all love to use our cards. This is actually not bad because consumers in Canada have the same attitude. Their average card purchases have gone up to $7,406 a year. But here’s where they do it right and we don’t – they pay their balance in full and on time. At least, 64% of them do so. That is not the same for Americans. We charge purchases to our hearts content and we fail in paying them back. We carry the balance over the next billing cycle and end up growing our debt unnecessarily because of finance charges.

So in the end, you can see that the credit card is not entirely to blame for our financial difficulties. We only have ourselves to blame. Instead of blaming them, why not use your card to improve your financial situation?

There are three ways that this can happen.

Use your charge card to practice credit management

The first advantage that will benefit our finances is using our credit card to practice credit management. Complete debt elimination is not necessary to be a financial success. In fact, some of the wealthy Americans have taken on debt and by applying credit management, have used it effectively to grow their personal net worth.

One of the ways you can emulate them is to learn how to maximize the use of cards without ending in debt. It is possible but it takes discipline and practice.

Credit management is the key to never be scared of debt ever again. Debt is a useful tool to propel yourself towards a wealthier you but you need to know how to manage it responsibly. Failure to do so will lead you to destruction. Here are some of the situations that you will be immersed in that will teach you the basics of credit management.

  • You will learn that the convenience of using someone else’s money comes at a price – the interest rate. It will make you more cautious about how you will use your credit.
  • You will be aware of terms like interest rates (APR), grace period, finance charges, billing cycle, and due dates. If you want to stay out of debt, these are the terms that you need to understand.
  • You will be cautious of making payments on time. To avoid late payment charges, your credit card will help train you to pay your due on time. Otherwise, you will be growing your balance and waste your money in the process.
  • You will learn how to budget your money to make way for your monthly credit card payments.

These are only a few of the things that you will learn as a credit card holder. If you notice, all these will happen as you try to stay away from debt. According to Gallup.com, Americans have started improving their credit card habits by lowering the average number of credit cards that they own (from 4 to 3.7) and making a habit of paying their dues on time. All of these improvements were caused by what consumers experienced when they were faced with too much credit card debt during the Great Recession.

Use your card to improve your credit score

Another benefit of using credit cards is to improve your credit score. A good credit score is an indication of good credit management skills. It means you can be trusted credit. It also means the creditors and lenders will not be forced to impose high interest rates on you to protect themselves from the chances of you not paying your loan.

There are several ways that you can use your credit card to increase your credit score.

  • Credit utilization. According to CreditKarma.com , there are many models being used to compute your credit rating and the most popular is the FICO score. In this model the credit utilization is 30% of your score. This is the ratio between your credit limit and your balance. If you can keep your balance low, you can increase your credit score.
  • Payment behavior. Another big factor in your credit score is your payment habits. When you pay your dues on time this will reflect positively in your credit report. In a FICO score, this is 35% of your overall credit score.
  • Opening and closing card accounts. Your credit score also looks at the old credit accounts that you have – the longer you have it, the better it will be for your score. In the same way, new accounts can lower your score if you apply for them all at the same time.

The beauty about using your credit card to maintain a good credit score is the fact that you do not have to reapply to keep in using credit – like you would for personal loans. You just have to keep your balance low and use your card repeatedly. After all, maintaining a good credit score will force you to use credit but not to be in debt. There is a difference. If you use your card for purchases and pay it off in full at the end of the month, a high score will not be a problem for you.

Use your plastic as a debt relief option

Lastly, your credit card can help you solve your debt situation through balance transfers.

There are 0% balance transfer credit cards that will allow you to pay off your debt without interest for a specified period of time. Here’s how it works.

You will apply for a new credit card that accepts 0% balance transfer. Then, you will transfer all your high interest balances to this new card. Depending on the credit card issuer, you will be given from 6 to 18 months to pay for your debts at 0% interest. You can maximize your monthly payments and you do not have to worry about any finance charges for the balance that will be left in the account at the end of the month. At least this is true until the 0% period ends.

There are certain tips to help make this debt solution highly effective.

  • Live on a frugal budget for the next 6 to 8 months so you can make high contributions towards your credit card payments. Take advantage of the 0% to lower your principal debt significantly.
  • Do not use your balance transfer cards for new purchases. It is, technically, still a credit card that you can use for purchases. However, most cards will only impose the 0% on the transferred balance. The new purchases might have high interest rates – which will increase your debt even further and defeat the purpose of the debt solution.
  • Do not use your other cards. For the cards that you transferred the high interest balance from – do not give in to the temptation of using them. The zero balance on your old cards will be very tempting to use.