I was reading an interesting blog post called "Top 5 Signs That It Is Time To Cancel Your Credit Card" by JSteele. I started reflecting on what Credit Cards are all about.
Credit cards can be used for good and for bad, and there are really two different groups of people that use them. There are some people who use them because it is really easy to pull it out, you don’t have to carry cash around, and you will never again get loose change for a purchase. This type of user is known as a convenience user and will pay there balance in full each month.
If you are a convenience user you should be looking at getting a credit card that has a great grace period. A grace period is the time that is allotted to a Credit Card user form the end of the statement period until interest charges start. For example, if I am a convenience user I would buy all my groceries, gas, entertainment, and pay my bills on this credit card. At the end of the statement period I would pay off all the debt I owe. Some of the benefits form being a convenience user are: not having finance charges, not having credit card debt which is a high interest debt, and getting various rewards.
The second group of people who use credit cards are those who use them to have a line of credit, those who are making purchases that they do not plan on paying off right away. If you belong to this group one thing that you should be looking out for is the Annual Percentage Rate (APR). APR is the percentage that the credit card company is going to charge you to on your unpaid balance. The lower this is the less you are going to have to pay. The benefits of using a credit card as a line of credit are being able to get something that you don’t have the cash to buy right now, having the ability to pay for expected or unexpected costs that you would not be able to pay for, and some would argue that it is an easer and better way to build your credit, however that can be debated.
Whatever type of Credit Card user you are you should make sure to abide by a few rules.
Make sure you know where you are spending your money – Credit Card spending can get out of hand if you don’t track it. Before you know it you can be in big trouble!
Make sure that you are paying some principal – You could actually get in a position where if you are just making minimum payments your interests will be bigger then your payments. This is called negative amortization, and is dangerous. If you continue to make minimum payments you will never pay off the debt, and in fact your debt will be growing.
Overall credit cards can be great tools. Make sure you are using them well and that you have the right card for your personality!