Before I opened my first credit card, I had already accomplished a lot of firsts of adulthood: started my first job and moved into my first apartment, to name a few. As a recent college graduate with a journalism degree at the time, I figured that since I already had a debit card, what else did I need?
Now that I’m older and steadily becoming somewhat wiser (thanks to an unexpected career in finance), the answer really is in the name: to build credit. When you eventually make large purchases like a house or car, a strong credit score will help you qualify for better interest rates.
Credit cards aren’t the only way to build credit. One way I was already building mine before I had a credit card was by repaying my student loans. Even paying your rent and utilities payments on time has an impact on your credit score.
That said, there are several other reasons to consider credit cards. They come with perks such as:
• Rewards and bonuses: many credit card companies offer this in the form of cash back, airline miles, or even sign-up bonuses;
• Protection: your identity and money are more secure when you use a credit card because it’s not directly linked to your account like a debit card is;
• Emergency cushion: emergencies can pop up at any time and at any place. This is why we encourage everyone to save up to three to six months' worth of expenses in an emergency fund. If your emergency fund is tapped or you need to quickly make a large, unexpected payment, a credit card can be a good Band-Aid in an absolute emergency. Don’t make this a habit, though – it can get you into trouble down the road.
What Should I Know Before I Get One?
Having a credit card sounds easy and almost perfect, right? Before you apply for one, here are a few things to consider:
Fees
You’ll want to make sure to read the fine print to know how much the credit card company charges for late fees, yearly fees (if there is one – yes, you can get a credit card for free!), foreign transaction fees, and so on.
APR
This is the annual percentage rate, which is the yearly interest you’re paying to borrow money. As long as you pay off your credit card every month, you won’t have to worry too much about this.
Your Habits
One of the key things to know before you sign up for a credit card is yourself. It’s easy to get carried away with a new credit card, especially if you have a tendency to overspend or disregard your budget. Missing payments and adding onto your debt will hurt your credit.
Should I Pay Off My Credit Card Every Month?
Simply put: if you can pay off your balance, do it.
It’s a common myth that it pays to have a balance. This is where credit cards can become a slippery slope. If you hold off on paying your credit card, it’s easy for these situations to become an issue later:
• You miss when your credit card bill is due. The result: You’re hit with a late fee;
• You tack onto your already existing balance, creeping up closer to your credit limit. The result: you hurt your credit score;
• You get into the habit of carrying a sizable balance from the previous month to the next month. The result: your interest grows. This means the total amount you owe grows, too.
The earlier you pay off your credit card, the better. Make sure to stay on top of it by setting up automatic payments.
Can You Pay it Off With Another Credit Card?
The question here isn’t really a "can you?", it’s a "should you?"
In other words, no, you can’t directly pay off one credit card with another. However, you may be able to do a balance transfer, which means moving your debt from one credit card to another with lower interest rates. It may even be possible to get a card with a 0% interest rate for a limited time. So while this doesn’t exactly count as a payment toward your balance, it does reduce the total amount owed on the credit card.
Still, depending on the amount you need to transfer, there may be a fee, which can trim the total benefit of the balance transfer. This article from Credit Karma goes into the pros and cons of this approach.
Another option for paying off a credit card is to take out a loan. Before moving forward with a decision like this, it’s always important to consider your current financial standing and weigh your options.
Can You Pay Off a Loan With a Credit Card?
While this may be an option (depending on the lender and type of loan), we encourage you to explore some other options before you go this route.
In this case, we recommend finding a strategy to pay down your debt. There are two common methods here:
• The debt snowball: this involves making minimum payments on all your debts while putting extra cash toward the smallest amount and paying that off first.
• The debt avalanche: This focuses on paying down the debt with the highest interest rate first and then moving onto the next balance.
The debt avalanche is the more "efficient method, but if you like to rack up early wins (and confidence!), the debt snowball is a good option for you.
P.S. If you have an emergency fund, you can use it for this, too.
Does Paying it Off Increase My Credit Score?
Paying on time will always help your credit score. Here are some other ways you can boost your score:
• Don’t borrow too much too often. Experts typically recommend keeping your credit utilisation rate below 30% of your limit;
• Keep your card with the best history of on-time payments open;
• Have a mix. When you’re ready and able, managing several different types of credit, like a mortgage or auto loan, can improve your score;
• Accept your mistakes and make up for them. This is another way that having multiple credit types can help;
• Fix any minor errors, like an incorrect address.
It’s also a good idea to check your credit report at least once a year. Various credit scoring apps are available. If you're having serious problems with debt, visit StepChange, the UK's leading debt charity.
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