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If you've had a bad experience with credit cards, you're not alone. Many households struggle to manage their cards. In fact, credit card debt in the U.S. reached $807 billion in the first quarter of 2019, as Americans carried over $6,000 in average credit card debt, according to Experian.
But there's a group of people who are managing their credit card accounts just fine, thank you. These consumers pay off their cards in full each month, getting added protections and benefits such as trip insurance and purchase protection without paying any interest.
When used responsibly, credit cards are an excellent tool for managing money, building credit and earning rewards. If you're on the fence about credit cards after some negative encounters in the past, consider these benefits and strategies to rebuild your confidence and restart using credit cards for the better.
How Credit Cards Can Help Your Finances
Many people are intimidated by credit cards because of past experience, a friend's horror story or simply a lack of knowledge about how they work. But once you understand how your credit habits impact your credit card interest rate and credit score, you'll find plenty of reasons to ease your way back into using credit cards.
Good Credit Habits Build Your Credit
The single most important factor credit scoring models like FICO use to calculate your credit score is payment history. Making your credit card payments on time every month is vital to building and maintaining good credit.
Your credit utilization rate, or the amount of available credit you're using, is the next biggest factor making up your credit score. Keeping your card balances low saves you money on interest while also helping you build credit. If you pay your balance in full by the due date, you don't even have to pay interest.
Good Credit Means Lower Interest
Who cares about your credit? Lenders, landlords, employers and banks commonly look to credit when making a decision. That means you also should pay close attention to it. If you have good credit, you'll likely qualify for better interest rates and terms on loans and credit cards in the future.
Some Credit Cards Offer Rewards
Some credit cards provide cash back or travel rewards when you use the card. You can earn your way to free hotel stays and flights, or take your rewards in the form of a check or statement credit, depending on the card. As long as you pay off the account in full every month, rewards cards can be valuable.
Credit Cards Help Manage Cash Flow
As long as you pay off your cards in full by the due date every month, you can use them as an interest-free loan when necessary. If a bill is due in a few days but you don't get paid until next week, for example, you may be able to charge it and give yourself a few weeks to pay it off before the credit card due date.
If you don't use a card in a given month and it has a zero balance, you still get credit for maintaining the card as agreed and don't have to make any payments.
How to Rebuild Your Confidence and Your Credit
One way to get started (or restart) with credit cards is to take small steps. Here are two to consider.
- Get a "starter" card. If you have no credit or bad credit, you could start with a secured credit card. These cards require you to put down a deposit equal to the credit limit and usually have lower spending limits compared with unsecured cards. A lower limit will help reduce your risk of racking up high debts.
Use it like any other credit card and build your credit with each on-time payment, as long as the card reports payments to the credit bureaus (check when you apply). When you reach the point where you are confident enough to open a non-secured card, you can close your secured card and get a refund for the original deposit.
- Don't miss payments. Set a reminder so you never miss a payment due date. It can take seven years for a late payment to drop off your credit report, so paying on time is essential for your credit.
The Bottom Line
If you use a credit card to pay for an expensive vacation, accessory or new TV you couldn't afford to buy with cash, you might be on track for more credit troubles. But if you use a card to only buy what you can afford to pay off in full each month, credit cards can provide many benefits, including improving your credit.