While most personal finance gurus, and even common sense will tell you to stay clear of credit cards, and their outrageous 25% interest rates, followed by additional fees, but for the discerning user, they can be more than just a boon, and aid in reaching financial and savings goals.
With competition intensifying among credit card issuers, perks, rewards, and bonuses are getting all the more outrageous. In this article, we take a look at times and places where you should use a credit, and times when you have to avoid them like the plague.
When Should You Use A Credit Card?
Depending on the terms, perks, and offers available on your card, these are a few instances when it makes sense to use them.
1. Big-Ticket Purchases
With purchase protection becoming an increasingly common perk among credit cards, it makes great sense to put expensive home appliances, or electronics on your card. You get free cover in terms of damages, or fraud, and you can save money on extended warranties and insurance.
2. Travel
Most consumer finance experts agree that booking hotels and flight tickets using a credit card comes with plenty of added value, especially when using co-branded airline miles cards.
It goes beyond just discounts, and travel protection, with many cards offering free upgrades, cancellation coverage, luggage protection, and more.
3. Boosting Your Credit
For young adults with no credit history, using a credit card responsibly is a great way to get started. Credit card issuers constantly report your activity to credit bureaus, and even with a secured credit card, where you will have to deposit funds upfront, this is a great way to build your credit application rating.
There are certain best practices to make the most of this strategy, it includes the obvious such as paying your bills on time, but apart from that experts also recommend not exhausting more than 50% of your credit limit. These are strong indicators of responsible credit users.
4. Offshore Purchases
Given the often tedious, and expensive hurdles in place when transferring money abroad, or converting your funds to a foreign currency, a credit card might just be the most convenient way.
In fact, the exchange rates offered on your credit card are a lot cheaper than bank, or money exchange services, with savings as high as 6%.
When You Shouldn’t Use Credit Cards?
Make sure to avoid the following credit card use cases in order to avoid exorbitant fees, and ruining your credit profile.
1. Investing, Trading & Gambling
There was a time when this was just sound judgment, but it seems millions of individuals have tried their hands at funding their stock, crypto, and betting accounts using their credit cards in recent years.
This has nothing to do with the performance of your investments, or speculative activities, but the additional fees involved.
Since credit cards consider such expenses as cash advances, users will be faced with 3% to 5% one-time levy, coupled with additional transaction fees given the risks involved in processing such transactions.
2. Down Payments & Balance Transfers
While it might seem tempting to put a down payment for a car, mortgage, or any other large purchase on your credit card, just the monumental interest rates should restrain you.
This again might come under cash advances, resulting in exorbitant fees, and anyone who opts for this surely doesn’t have the cash to pay off their balances quickly, meaning this is often the first step towards the dreaded debt trap that many credit card users find themselves in.
Even though it isn’t explicitly stated, many people believe that putting such expenditures on a credit card is often a slippery slope for individual credit scores. After all, this in no way reflects sound financial judgment.
Final Verdict
If someone tells you to stay away from credit cards, they have no idea what they are talking about. In fact, the efficient, and prudent use of credit remains one of the cornerstones of successful personal finance management.
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