Credit cards as a financial opportunity not a liability

“Do not buy what you cannot afford” was the best credit management advice that I received from my immigrant parents. They might not have fully understood the fees that came with credit cards; but they knew that borrowing money always came at a cost. Having access to credit can be very exciting because your credit limit may be larger than your savings. However, if we buy things we can’t afford on credit we will end up paying way more for those things in interest. This is the easiest way to fall into a debt spiral. Here are some tips that I always keep in mind to make sure I am using credit cards as an opportunity to reach my financial goals and not as a liability:

Pay your bill on time and in full every month

Do not buy what you cannot afford. This continues to be one of the best pieces of advice I could have ever received. You will avoid paying interest by keeping this in mind. This will give you have the ability to pay your credit card before it comes due. If you have the money in the bank to buy something in cash use your credit card to make the purchase. The benefit of doing this is that you will build a healthy credit score and can save money on larger loans when you need them!

Avoid using credit cards for emergencies

Unfortunately, this is the most common way that people get into credit card debt. Although at the time this may feel like the only way out, the reality is that the better option is to plan for these incidents. This is why we need to establish an emergency fund. An emergency fund is money saved specifically to deal with financial issues. If you begin to establish an emergency fund when things are going well then you may be able to weather down the storm without using credit cards. Read more about how to establish an emergency fund through budgeting.

Keep your balance at or below 30% of your credit limit

Keeping your balance below 30% will improve your credit score as it represents 30% of your credit score. This means that if you have a total credit limit of $5,000 you should only keep a balance of $1,500 or less. Calculate this number and make note of it as your personal credit limit. If you do this early on your credit score will improve. This will increase your chances of being eligible for a higher limit, increasing your 30% threshold overtime. 

Take advantage of rewards

Taking advantage of rewards is a very popular way to use credit cards as a money saving tool. It is important to note that if you are not paying your monthly balance in FULL each month then any potential savings may be eaten up by fees very quickly! Reward cards are usually only available for those with fair to good credit. Start with a basic credit card and establish good credit card habits and then seek out rewards. There are many types of reward cards. Some of the most common reward cards include:

• Travel rewards – Allow you to earn points with each dollar you spend and redeem them for flights, hotels and rental cars.
• Cash Back Cards – Offer cash-back which means you’ll receive a portion of your spending back, in cash or as a credit to your statement. Cash-back cards can offer more rewards for specific purchases such as groceries, restaurants or gas so it is best to find a cash back card that aligns with your lifestyle to get the most benefits. 

Open a credit card as early as you can to establish your credit score

This, along with good habits early on, can help you establish a good credit score . The average age of your credit is also a factor that affects your credit score and opening a credit early on can increase this along with your credit score. If you are not approved for a credit card due to limited or low credit you can look for the following options to get you started:

• Secured credit card – These credit cards require a security deposit to open. This is meant to protect the lender in case you are unable to pay your bill. They are generally easier to qualify for because they are less risk to the lender. Once you establish yourself as a low risk borrower and increase your credit score you can get your deposit back and get a regular credit card.
• Store cards – These credit cards are usually easier to get. They report to the credit bureaus which helps establish your credit. It is important to note that these cards have higher APRs and lower credit limits so they must be used responsibly in order to benefit you.
• Student credit card – This is how I personally started to establish my credit. These credit cards require you to have enough income to cover your monthly bills but they allow you to have limited credit or better (just not bad credit). 

Keep these things in mind while using your credit cards in order to realize credit cards are a financial opportunity not a liability!