5 Rules for Using Credit to Your Advantage

There are few different schools of thought when it comes to credit – especially when we talk about credit cards.

Some advocate complete abstinence, encouraging the use of a cash only system. Others don’t see anything wrong with revolving credit card balances, as long as those balances don’t exceed certain percentage of your gross income.

I believe there is another approach to using credit, which can provide a host of benefits to consumers, provided that consumers play within certain boundaries.

What if you could learn to use credit cards to your advantage? What if credit card companies could pay you instead of you paying them interest for the privilege? Yes, it is possible to use credit instead of letting credit use you. Here are 6 simple rules to play by.

1. Choose the right credit card based on your spending habits.

Not all cards are equal and not all consumers behave the same way. Credit card companies understand this and hence offer different levels of rewards for different consumer behaviors. Before choosing a credit card, take some time to understand your spending habits. Where do you spend the bulk of you regular monthly budget? Groceries? Restaurants? Gas and Transportation? Utilities? Once you understand where the majority of your monthly budget goes, choose the card that offers highest rewards for those expenditures. There is nothing better than getting paid for what you are already doing on regular basis.

2. Beware of store cards

In general, store cards are not your best friend. Opening store charge accounts will quite often lower your credit score, and what’s more, they can get and keep you in trouble. Most cards offer a one-time discount on purchases made when you open your account, with hopes that you will continue buying your favorite brands and pay high interest rates while you do it.  There are a few cards that do offer a continual discount on every purchase you make, but make sure you read the fine print before you do opt for a store charge card.

3. Pay off balance in full every month – non negotiable

This is most obvious and sadly most ignored credit card rule.

What every responsible credit card user understands is the fact that as long as you pay your balance in full every month, you remain in control. As soon as you start keeping a revolving balance, you give the control over to your credit card company.

Revolving a balance means you are willingly paying premium for the items you purchased using your card.  So make a decision that as soon as you stop paying your balances in full, you stop using your cards!

4. Don’t pay fees – unless it makes sense

There are many cards that require yearly one-time fees and there are those that don’t. Before you dismiss a credit card solely based on the yearly fee, I would encourage you to look at the rewards it offers. If the card gives a very high return on your purchases (especially your most common ones) calculate the returns minus the fee versus much lower reward points on a no-fee card. The math should tell you all you need to know in order to make the right decision.

5. Don’t forget to collect your rewards! Obvious and hidden ones!

Get in a habit of cashing in your reward points / cash back points on regular basis. Have a plan for what you’ll do with those rewards. You may want to set it aside as a vacation fund or a Christmas fund. Maybe use it to make one extra early mortgage payment (if cash back is what your card offers). The point is to have a plan. And always understand all of your “hidden” benefits since those are often overlooked. Some of those may include:

• Automatic extended warranty up to 1 year on certain items
• Automatic car rental insurance
• Trip cancellation insurance

Credit card usage has been abused for so long that for many the best solution, at least for a season, is to stop using them.

But once you understand and acquire the habit of responsible credit card usage, you can take advantage of the process. Establishing your credit history, earning cash back or rewards, and convenience are just a few perks for those who can play by the rules. The rules are simple and can be summed up in this one statement:

Don’t spend the money you wouldn’t otherwise have, and always pay your bill in full every month.

Megan is one of the new additions to the Finicity (provider of Mvelopes and Money4Life Coaching) team. She comes with over 13 years of experience in the Biblical Finances area. Her content has been published by Money Matters, Do Well and Lifeway's More than Living. She is a mom of two young boys, and lives with her husband David in the Atlanta area.

Publication date: June 12, 2013