How To Use Your Credit Card Correctly

January is the month when many people take time to reflect on the year gone by and make changes for the year ahead. Some resolve to make lifestyle changes such as spending more time with their family, or choose to improve their health by exercising more regularly. Others will pledge to improve their finances through carefully managing their money and budgeting for the year ahead.

When planning a budget you need to look at how you can make your money go further and one way of doing this may be to transfer any existing debt onto a credit card with 0% interest. Although taking out a new credit card may not seem like an orthodox piece of advice the point needs to be made that, when used correctly, credit cards can be a powerful tool to help manage your money.

But, given the temptation to just put everything on plastic, how do you make sure you use your credit card correctly?

One of the first things to remember is that you must use your card responsibly.

To use your card responsibly you must make sure that you do not overspend on your card as this can lead to interest fees being incurred or, should you spend more than your agreed credit limit, penalty fees being charged to your account.

The number one rule when using a credit card is that you should be able to pay off the full balance at the end of each month and overspending on the card can make this more difficult to achieve.

It is also important that you don’t use your credit card, even if it is an interest free credit card, as an emergency fund. If you are caught short for cash one of the easiest things to do is take out your credit card and worry how you’ll meet the payment at a later date. But doing this can throw any budget plan way off course and should be avoided at all costs.
 
Similarly, avoid credit card cash advances wherever possible as they start to accrue interest immediately and, in many cases, this will be at a higher rate of interest than the rate the card gives you on purchase and balance transfers. In addition, you will most likely be charged for drawing money on the credit card which could be a flat rate or a percentage of the amount you have withdrawn.

So once you know how to be responsible with your credit card, how exactly do you use it correctly?

As mentioned above, the first thing to remember about using a credit card correctly is that you should be able to pay the balance off in full at the end of each month. If you do not do this you will certainly accrue interest on any outstanding balances, often at a rate of around 20 per cent, and you also run the risk of incurring late charges.

This is not so much of an issue if you have a credit card that offers interest-free credit on purchases but when using such a card it is important to keep track of when the interest-free period ends and make sure you have paid off the balance by that point.

And once you know how to use your credit card correctly and responsibly, it’s time to start making the card work for you!

Many people are of the opinion that you shouldn’t use your credit card for everyday purchases, which is sound advice if you are not going to keep track of your daily outgoings as the debt will soon rack up. But, if done correctly, using your card for everyday items such a petrol and grocery shopping means that you can keep your hard earned money in your bank account for longer and take advantage of the banks paying you interest on this.

But the only way to do this successfully is to keep a record of everything you spend – keeping receipts is the simplest way to do this – and make sure that you pay off the balance in full at the end of each month. If you do not adhere to this it becomes a pointless exercise as credit card interest rates are way above anything that the banks are likely to give you in interest on the money in your account.

It is also important to remember that, when doing this, you use your credit card for the things that you actually need and not for luxuries that you simply want!

Using your credit card regularly also helps to build your credit history and improve your credit rating which, in turn, will get you better deals in the future which could lead to lower rates of interest and interest-free periods that can last up to 18 months.

In addition, some credit cards will offer cash back, air miles or reward points that can be used to redeem luxury items and so by using your card regularly you can quickly reap these rewards.
But the most important piece of advice, and the one that will render all of the above useless if not adhered to, is that you must pay off your balance in full at the end of each month. And it’s also worth bearing in mind that, if you have tried and failed with credit cards in the past, then they may simply not be for you and it may be wise to steer clear of them altogether.

On the other hand, if you are confident that you can stick to the tips outlined above then credit cards can be a great way to make your money go further.

Article written by Les Roberts, credit card user and writer at Moneysupermarket.com