Credit cards can be a touchy subject for some people but they are a critical element to banking and have the potential to positively impact your financial wellness.
Credit cards can be a touchy subject for some people. Most likely, you or someone you know has had a bad experience with credit cards i.e.; racking up debt, maxing out your card, high interest rates, missing a payment etc. While using a credit card irresponsibly can negatively effect your life, they are still a critical element to banking and have the potential to positively impact your financial wellness. With that being said, here are 4 reasons why you should take out a credit card.
1. Boosting Your Credit Score
A credit score is a number given to an individual that indicates how likely they are to repay a loan. Credit scores are looked at when an individual attempts to take out a loan, rent an apartment, or even take out another credit card. The average credit score needed to take out a conventional loan is 620 or higher. Any number below that runs a risk of your loan request getting denied. The first step to building a good credit score is taking out a credit card. If you don’t take out a credit card, you won’t exist in the eyes of a lender and therefore will not qualify for any loans. In order to build and maintain a good credit score, you should purchase items with your credit card and pay off the bill in full every month. There are even “credit-builder” loans you can take out and pay off for the sole purpose of building your credit. A good credit score lets lenders know that you are reliable and capable of paying your bills on time.
2. Fraud Protection
When purchasing an item either online or in person, you always run the risk of fraud. Fraud is what happens when an item is purchased and the seller doesn’t come through or when your debit card information is stolen and used to make unsanctioned purchases. Credit cards are unique from cash and debit cards in that they don’t provide access to any of your actual money. When a debit card is used, money is pulled directly from your account and placed into the account of the individual or company that you purchased something from. When a credit card is used, money from the bank is reserved for that purchase but no money actually changes hands. If someone were to steel your credit card information, your bank account and the money in it remains safe and secure. Credit cards protect your money in a few different ways; Credit cards have a limit to how much money can be used within a certain period of time, so if fraud does occur, the card will stop working after that credit limit is reached. Another way credit cards protect your money is through online transactions. If you buy an item online and the seller doesn’t come through on their promise, you can claim the purchase as a fraudulent charge and you won’t have to pay those charges on your upcoming bill. If your credit card were to get stolen or you suspect fraudulent charges to your account, you can notify your bank and they will quickly deactivate your card and most banks will refund you for every unauthorized purchase made in your name. Because credit cards are not connected to a line of actual money, you are less likely to be susceptible to banking fraud.
Banks make money through the interest payments on credit cards so they want you to take out a line of credit with them. In order to entice consumers to bank with them, most banks offer special perks with their credit cards like cash back on specific purchases, travel points, rewards etc. Certain credit cards even offer special rewards to students and seniors. While 1% cash back on all grocery purchases may not seem like a lot, it definitely accumulates over time and can actually save you some big bucks. The best way to find a credit card that provides the most benefit to you is by simply shopping around and comparing rates and perks.
4. “In-case of Emergency”
A well known statistic from the Federal Reserve found that 40% of Americans do not have $400 on hand in-case of an emergency. While it is recommended to only use your credit card for purchases that you can afford, life is unpredictable and unforeseen emergencies do happen. A credit card allows you to pay for things immediately even if you don’t have that amount of money currently in your bank account. With the help of a credit card, you can pay for emergency medical bills or car troubles immediately which can help you quickly get out of a sticky situation.
While taking out a new credit card may seem scary, it is essential to your journey to financial wellness. There are ways to use a credit card without racking up a single penny of debt. The “best practices” when it comes to using a credit card is paying it off in-full month to month and picking a card with a low interest rate and perks that suit your needs.