The credit card: a most valuable tool for building credit

A credit card is a small plastic card issued to the consumer by a financial institution such as a bank or credit union. The card issuer creates a revolving account with a line of credit to the consumer. The cardholders can purchase goods and services or receive a cash advance, until they have reached their predetermined credit limit. The merchant who accepts credit card payments receives the money from the bank issuing the card. The cardholder eventually repays the bank through regular monthly payments. If the entire balance is not paid in full, the issuer usually charges interest on the unpaid portion.

Credit cards can be an extremely valuable tool if used correctly. However, there are also risks for those who lack self-discipline for the debt they cannot repay. Although when used responsibly and with the correct intentions, the card can provide significant benefits. Here are some of the attributes of owning a credit card:

Convenience

The credit card is a flexible payment tool accepted at over 30 million locations worldwide as it has become a good alternative for cash. On many occasions, situations arise where you need more funds than what are immediately available. Emergencies such as home or car repairs, medical expenses, travel for a family crisis, are attainable instantly with a card. Such credit spending should be done with a short term intention with timely payments to avoid accumulating debt.

Establish and Boost Credit History

Paying your bills in full and on time indicates responsibility which helps to boost credit rating. A good credit rating also helps in many other situations, such as, obtaining a loan with a low interest rate. More than likely, your card company will also approve a higher credit limit.

Borrowing Interest Free

Credit cards allow you to use the bank’s money interest free within a grace period. Therefore, payment for purchases on the card are due at the end of the pre determined period. Paying your balance in full each month enables you to receive an interest free loan month after month.

In order to entice new customers, card issuers frequently create 0% interest rate promotional offers for credit card purchases and cash advances. The only limitation is for the credit loan to be fully paid back at the end of set time period. If used wisely, one can use the credit card 0% interest loan to pay off higher interest rate debt. As long as you have the self discipline in controlling spending, this type of financing can be a valuable tool for money management and budgeting.

Tracking Spending

As the credit card issuers provide detailed monthly statements on purchases, they allow you to keep track of your spending with ease. For business owners, the summaries are a valuable tool for tax return preparation, as they provide information for allowable tax deductions.

Rewards and Benefits Many companies offer rewards and cardholder benefits to their customers. Loyalty programs have been designed to encourage cardholders to use one specific card. As the card is used, the cardholder accumulates airline miles, hotel chain points, cash back points etc. that a cardholder can redeem for products or services. For those who use their cards frequently, the rewards can be quite substantial.

In addition to loyalty program rewards, cardholders also reap benefits that include complimentary car rental insurance, travel insurance or overseas health insurance.

Consumer Protection

For mail order purchases that are not received, or turned out to be defective, the charge can be disputed with the credit card company. The burden of proof lies with the sender; therefore, the consumer has limited financial liability. Such consumer protection provided by the credit card company is not available with most debit cards or when paying cash.

Protection from Fraud

Carrying cash can be unsafe, as it can be stolen or lost. The lost cash is rarely replaceable. Instead, a misplaced or stolen credit card can simply be inactivated by the card issuer and a new one reissued. As for any fraudulent charges, they can be challenged. Upon investigation, the charges are usually forgiven or refunded.

Responsibilities of the Credit Card Holder

A Cardholder can maximize their benefits by,

• Paying on Time – On time payment is the best way to avoid late fees and penalty interest, and at the same time, boost credit score. The simplest way to ensure on time payments is to set up an automatic bill pay system.
• Paying More than the Minimum Due – If balance can not be paid in full, it is vital to pay as much as possible over the minimum.
• Not Using Your Credit Cards’ Upper Spending Limit – Having the maximum amount charged can lead to recurring fees and interest expenses. Maxing out the credit card also leads to a The rule of thumb is to keep the card balance below 30% of the limit. By spreading purchases between several credit cards, you can manage the 30% limit with minimum difficulty.
• Avoiding Unnecessary Fees – Many credit cards charge various fees: late payments, over limit, cash advances, transferring balance or returning check. Read through your credit card agreement to be fully aware of all the fees. Avoid these transactions as much as possible.

Change of Terms and Conditions

Credit card companies frequently change the terms and conditions. Such changes often include fee structure, interest rates, billing, and other features. More often than not and to your detriment, these modifications benefit the card issuer. Be aware of these changes as it can help you utilize the card more efficiently. For example, a cash advance fee increase could prompt you to use a different card for cash advances.

As described, owning a credit card can be very advantageous. However, if not handled properly, it can become a liability, such as

• For non timely payments, a credit card loan carries a higher interest cost than other forms of credit
• It can create poor credit scores due to late payments
• It allows you to have a false sense of security thus accumulating more debt than manageable
• It complicates your living with complex terms and conditions

It is critical to always use your credit responsibly. Credit problems such as extending credit limits to the maximum can result in a poor credit scores.