Are Credit Cards The Best Finance Solutions?

Whether you're just starting out or you've been here for a while, you've probably received a "Pre-Approved Credit Card" envelope in your mailbox or you were at your favorite store when the cashier says, 'Oh, you could save 25% off of your total today if you apply and get approved for our store card!" I've been there. A million times it seems and yes, it is so very hard to not give in and take the usually very hefty discount and start collecting 10,000 points to receive a rewards gift card to use on my next purchase! I have turned many down but when it comes to a shop I actually buy from, even if just for a big purchase once a year, I will take it! But, is this a smart move? That all depends on you and how much you can handle. It can turn into an extremely dangerous game if you fall into the traps.

Are Rewards Cards Worth It? 

They sure are! OK. Well, they sure are IF you will actually use the rewards and the rewards don't require you to spend a fortune just to collect a measly $10 gift card. They also aren't too worth it if you have to pay an annual fee . Especially when the annual fee ends up costing more than what your reward redemptions are. 

If you have the time to spend on your credit cards each month or even each week and you aren't going to go crazy shopping until you've used up your credit limits, you could be taking advantage of some very serious rewards and getting the most bang for your buck! This will require checking in with your accounts and reading the fine print. Lots of fine print. It's probably a wise idea to be able to understand the fine print too. 

Card A is offering no interest for the first 12 months AND they are offering double rewards points for your purchases. Besides that, you just saved $150 on your very first purchase because you opened this account. But, your interest rate will be 24% after your introductory period. If you don't use it again until today's shopping trip is paid in full and you pay the balance off before your 12 months expires, you could earn an additional $100 in gift cards for this retailer. Not to mention, having the extra available credit sure would bump your credit score up a few points! So far, everything sounds great! You just need to have self-discipline and be sure to stick with your original plan. It's OK to maybe use it a few more times just to gather another $50 rewards card just as long as you can still cover that balance before the 12 months period is up. (If you can't afford to cover the full balance, your card will charge you interest on the original balance and all at once. This could lead to even bigger problems. It could end up putting you over your credit limit.

Card B features the same, no interest for 12 months (again if you do not pay your balance off in full by the due date, they will pile all of the interest from the entire 12 months for the entire balance onto your bill.) There is also an annual fee of $39 unless you spend $1000 a year and reach their "Platinum" rewards level. You just have to be cautious when reading the fine print that comes along with your card. They will tell you about the highlights of their program but it is up to you to find out that you have to spend a certain amount each year before you get the ultimate rewards points and the extra free gift on your birthday and anything else they throw in there to make it sound good. Depending on how often you will use the card and how often you already shop there, you might want to skip this card or you might want to go ahead and accept it so you can take advantage of the initial savings but pay it off and send it back afterward.

How Many Credit Cards Should I Have? 

This is entirely up to you. It all depends on how much you can handle and how much time you have to be sure your bills are paid on time each month and you are reading everything that is on your contract. If you're well versed on credit cards and are quite savvy (and responsible!)  when it comes to getting cash back from your online shopping, earning rewards, not paying interest or paying minimal interest, and you aren't going to go nuts and spend to your limits and only pay the minimum, go for it! You still need to be careful because applying for too many credit cards or having too high of a balance could end up damaging your credit score. 

Everyone's situation is different but one thing is for sure, applying for too much credit at once could make you appear to be a "risky" borrower. Along with having too many "hard inquiries" on your credit, banks may turn you away because you seem too desperate since you just applied for 8 lines of credit. One credit card application usually results in about 5 points being removed from your score. Typically, you'll have those few points back in about 6 months as long as everything else goes well. If you're planning on house shopping or even car shopping, those few points could affect you so you may want to plan and schedule applications responsibly. 

Credit card debt affects 30% of your FICO score so you will want to keep those balances down. Most experts recommend using only 10% (max) of your available credit. Having credit available to you helps your credit score and will show lenders that you are a responsible borrower. 

If you're not a fan of credit cards but would like to build your credit up so you have more options in the future when buying a home or another big purchase, you should at least apply for 2 credit cards. Ideally from 2 different networks. Make the most of it by researching the best rewards plans that best suit your lifestyle! I don't personally fly so I never bother with any sort of card that offers airline miles. There are so many perks and bonuses tacked onto credit cards it can seem overwhelming when looking for the best option but, it's well worth it to find rewards you would actually use. 

Life happens and sometimes no matter how responsible we are and how excellent our credit is, things can happen that are completely out of your control. It happens to almost everyone at least once (some of us more than once!) Of course it's always best to make sure you can pay for what you're spending and always make your payments on time and even try to pay more than the minimum each month. (There do seem to be disagreements as to whether it's best to keep paying your balance in full each month or paying just more than the minimum. I believe this is also a personal preference. I usually opt to pay double the minimum for most of my cards.) But don't be so hard on yourself if you hit a rough spot. There are options and finance solutions. Just keep your head up and plan on bouncing back as soon as you can!

Always Read Your Credit Card Contracts

Credit cards can be very useful in times of emergencies and when building credit. But, what happens when the interest starts to pile up and reality kicks in and you start to realize that it will take close to a decade to pay off a $500 purchase?

Of course, there are times when we can’t simply pay the full balance on credit cards each month. Maybe not even more than the minimum. We’ve all been there. You might start searching for options when you get stuck and sometimes it seems that opening new accounts might really benefit you and your credit.

Balance transfers are an ideal way to consolidate debt and try to lower your monthly payments. Sometimes you’ll find a higher interest rate for balance transfers. Other times you may see the special introductory rates of 0% interest and that might be enough for you to jump at that offer! Be warned, if you don’t read every word on that annoying little pamphlet that comes with your offer or with your card, you may be in for a rude awakening if something happens down the road. That jaw-dropping 0% introductory rate may only be good for 12 months and it may also only be good for that specific balance transfer. (Don’t start making purchases with that card thinking you don’t have to worry about interest!) Some credit cards will stop the 0% rate if you miss a payment or you are late with a payment. One of the tricks I’ve found when I was lured in for a 0% interest rate was most of the time, these cards will add their regular interest rate at the end of the 12 months if you haven’t paid the balance off yet. (Sometimes you’ll find that they will also add the interest that would have been there from day 1.)

The most important thing to do is to read every tiny line. There are a lot of hidden rules inside those tiny print contracts. You don’t want to have to be even more surprised later down the road. Especially if you were in a bad spot and used this to save yourself only to find that it will end up making things worse.

A credit card interest calculator is a very handy tool to have! Whether you just want to check on random amounts and how much you would pay if you buy a new stereo, use your card for vacation, or just use it for regular everyday purchases, this can be very eye opening.

If you are in a position where you can afford double the minimum payment or even just an additional $20 on the minimum payment due, take advantage of that! It may seem small but you’re saving yourself months and even years of payments and quite a bit of money.

If you look at your statements each month to see what you were charged for interest and deduct that from your minimum amount due, you might be in for a shocker! Buying that game console may have seemed like a fun idea but when you realize that you will end up paying (in some cases) 3 times that amount, you might try to find another way to earn enough money to make that same purchase with cash.

Just a few more things to keep an eye on when jumping into credit cards and finding yourself swimming in debt:

Rewards cards are only really worth it if you can commit to paying your full balance off each month. (This is a great way to entice people to apply for credit cards but you could end up paying much more in the long run.)

Be sure to check the fees that are included with your credit card. There may be annual fees, late fees, and even administrative fees.

Check and recheck the interest rate and be sure you understand the rates and how they could fluctuate depending on your payments and usage of that card.

Check your credit report periodically and take note of the effects of these cards on your credit.

If you find yourself stuck and you feel overwhelmed or you need some help, it’s always best to check with professionals to evaluate your options and how you can take control of your future. Nationwide Debt Reduction Services could help you catch up and breathe much easier!