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Credit Cards

Credit cards are a great tool to have in your financial toolkit. Not only are they convenient, but they also extend your purchasing power. But when used without a certain discipline, credit cards can create as much harm as they do value. Credit can be expensive. Interest rates vary, but they generally range between 14% and 22% annual percentage rate (APR). There are other costs, too, like finance charges, annual fees, and penalties for late payments. In order to protect yourself from financial pitfalls and make the most out of your credit card, you must obey one simple rule: Know thyself.

Many people find themselves overspending on credit—and it’s hard to place blame. It’s much easier to buy something you can’t afford when you’re handing over plastic rather than cash. Before you know it, you’re financially overextended. What was once a benefit has become a barrier. This is why it’s so important to know yourself, your financial goals, and to create clear boundaries around credit card use. Here are three distinct benefits to using your credit card with intentionality.

Credit cards help you build or improve credit

Credit cards can help you build credit—whether you’re early in your financial journey or recovering from mistakes later on. Using your credit cards and making regular payments over time may increase your FICO score. Your FICO score ranges from 300 to 850; the higher the score, the better—and the more options you may have available for obtaining credit.

There are five distinct parts to your FICO score. Your payment history makes up 35% of your score. (Paying your bills on time also helps your score, while frequently missing payments will hurt your score.) Your total balance relative to your credit limit accounts for another 30% of your credit score (The less you owe against your balance, the higher your FICO score.) Next, the length of your credit history accounts for 15% of your score. (The longer you use credit, the better.) Newly opened accounts make up 10% of your score, and the final 10% relates to the blend or “mix” of credit you use. Credit cards are revolving credit, and loans are considered installments. Carrying a variety of credit shows your capacity to handle not only volume, but different kinds of credit.

The rate you get on future loan products is dependent on your credit score. If you have a high credit score, you’ll end up paying less for your home or car—and this can mean a savings upwards of many thousands of dollars.

Credit cards provide security and safety

While debit cards and credit cards are both built to protect you, when it comes to fraud, there’s something admittedly more alarming about seeing a drained checking account versus seeing a $500 charge on your credit card. In the first instance, it’s your actual cash. In the second, it’s essentially borrowed money.

With an empty checking account, you may have to get a provisional credit, which is a temporary credit that’s applied when fraud’s been detected or a transaction is being disputed. During this time, your financial institution will investigate, and, depending on the findings, the provisional credit will either be removed or made permanent. This is the less convenient option, and could lead to overdraft or third-party fees in the meantime—say, when your rent check bounces because your account is insufficient and your landlord therefore charges you an extra $50.

Things are a little easier when you spot a fraudulent charge on your credit card. You simply alert your financial institution to the incorrect charge, and in most cases, that’ll be the end of it all. In some situations, you’ll have to sign an affidavit. With more purchases being made online and digital fraud becoming more sophisticated than ever, credit cards offer ease and assurance in some of the worst-case scenarios.

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Credit cards offer great rewards

Credit card rewards are just that: a reward for using your credit card. It’s not too much of a stretch to consider rewards free money (or free airfare and hotel stays). For example, if you choose a 2% cash back card—and if you’re paying down your credit card every month—everything you buy is 2% off. Or you can use your credit card to pay everyday expenses like rent or utility payments, getting 2% back on those purchases over the course of the year. A debit card and cash can’t offer this. Only credit pays you back for using it strategically.

It’s worth remembering that a credit card is designed to make a bank money. It’s convenience for the consumer, but credit card interest, after all, makes money for the issuer. Some banks and credit card companies have annual fees and balance transfer fees in addition to their stated interest rate. And don’t forget that you will get hit with those high interest rates if your balance grows on your credit card. There is plenty to be conscious of when you choose a reward card. And depending on your usage, finding the card that’s right for you can help you overcome fees and focus on the advantages that a rewards card has to offer.

How many credit cards is too many credit cards?

When it comes to how many cards you should carry, remember the first and most important rule related to credit cards: Know thyself. It can be helpful to have three credit cards: a primary card, an emergency credit card, and a third, more specific card—it could be for a retailer like Amazon, Nordstrom, or Disney, or it could be for a particular reward, like double points on dining out or gasoline. You have to know your comfort with complexity. Keeping track of several credit cards might be beyond your comfort level.

Having said that, credit cards are an essential part of money management, and maintaining numerous credit cards may provide numerous benefits.

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