Strengthen Your Finances With Wise Use Of Debit & Credit Cards

by Mechel Glass, Banks.com Contributor (@CredAbility)

One of the best and easiest ways to stay out of debt and reach your financial goals is to use debit and credit cards for different purchases. One of my basic rules of personal finance is to use debit cards for small, everyday purchases and use credit cards for larger amounts (such as hotels and airline tickets). This behavior allows me to keep my spending in line with my budget and qualify for rewards points offered by credit card companies for larger purchases.

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When I teach classes on budgeting and credit, many people do not have a strong plan in place to build a budget or to build their credit.

Below are a few questions and answers on how you can achieve both of those goals:

What are some of the key factors people should consider when deciding whether to use credit or debit cards?

There are three main factors to be considered: first, what is the cost associated with the transaction; second, if you use credit, the length of time it will take to pay off the purchase; and, third, if you can save money by using an alternative method of payment without an additional cost.

Once you’ve determined your monthly budget and priority spending plan, always use a debit card to pay for small purchases (such as coffee, lunch, and entertainment). If there is a purchase that costs a bit more than your budget allows, try to save up for that purchase instead of using a credit card. For example, if you plan to buy $200-$300 of new clothes, it’s best to save $200-$300 and use your debit card rather than pay for this purchase with a credit card.

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Finally, if you must make a payment with a credit card, think carefully about how long it will take to pay it off. If your budget only allows for $100 extra each month (after all your bills are paid), a large expense made with a credit card will take several months to pay off.

What are the best actions I can take to build my credit score?

Payment history and the amount owed on your credit card(s) makes up 65% of your FICO score, so I recommend careful management of these two areas. Because payment history accounts for 35% of your score, I recommend that you make payments on time, month after month, with no exceptions. And, if at all possible, I recommend paying more than the minimum amount on your credit cards.

Because payments on the amount owed accounts for 30% of your FICO score, I encourage people to carefully watch the amount used on their credit limits.  If you have a credit card with a $3,000 limit and you regularly owe $2,800, this behavior will not help your score. Using no more than 33% of your credit limit – and, if possible, less than that amount – will have a favorable impact on your credit score. The lower the utilization, the better.

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What’s the best advice for using a credit card to help build my credit?

Anyone deciding to use credit cards to build their scores should initially consider their payment habits and their household income. People usually know how much additional credit they can take on. For example, a person that spends $200 per month eating out should consider cutting this expense before increasing the amount of credit.

Keep in mind that most credit cards will have an interest rate associated with it, and $200 per month will quickly add up with a 12% interest rate attached to the terms and conditions.

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How should people protect themselves against credit and debit fraud?

There are five actions you can take to protect yourself:

• Monitor your daily transactions by going online to see that there is no unusual activity in your accounts
• Spend money wisely by using credit cards for major purchases (instead of candy bars, movie tickets, and other small purchases)
• Do not share your financial information with others unless they are an authorized user of the debit card or credit card
• Carry only the debit or credit cards that you plan to use (e.g., during a summer vacation, mall shopping, or car rental)
• Monitor your credit reports regularly.

The credit report is your ‘report card’ for all of your purchases that utilize credit. Make sure that you are scored correctly and you are not a victim of fraud. If you aren’t sure that you can keep up with your credit card payments, stick to your debit card until you have a handle on your spending behavior.

Checking your credit report regularly is an absolute must if you want to ensure a successful financial future. Be diligent and you will thank yourself later when you’re trying to make a large purchase using credit.

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