The Credit Card – A Most Valuable Tool For Building Credit

A credit card is a small plastic card issued to the consumer by a financial institution such as a bank or credit union. The card issuer creates a revolving account with a line of credit to the consumer. The cardholders can purchase goods and services or receive a cash advance, until they have reached their predetermined credit limit. The merchant who accepts credit card payments receives the money from the bank issuing the card. The cardholder eventually repays the bank through regular monthly payments. If the entire balance is not paid in full, the issuer usually charges interest on the unpaid portion.

Credit cards can be an extremely valuable tool if used correctly. However, there are also risks for those who lack self-discipline for the debt they cannot repay. Although when used responsibly and with the correct intentions, the card can provide significant benefits. Here are some of the attributes of owning a credit card:


The credit card is a flexible payment tool accepted at over 30 million locations worldwide as it has become a good alternative for cash. On many occasions, situations arise where you need more funds than what are immediately available. Emergencies such as home or car repairs, medical expenses, travel for a family crisis, are attainable instantly with a card. Such credit spending should be done with a short-term intention with timely payments to avoid accumulating debt.

Establish and Boost Credit History

Paying your bills in full and on time indicates responsibility which helps to boost credit rating. A good credit rating also helps in many other situations, such as, obtaining a loan with a low-interest rate. More than likely, your card company will also approve a higher credit limit.

Borrowing Interest Free

Credit cards allow you to use the bank’s money interest free within a grace period. Therefore, payment for purchases on the card are due at the end of the pre-determined period. Paying your balance in full each month enables you to receive an interest-free loan month after month.

In order to entice new customers, card issuers frequently create 0% interest rate promotional offers for credit card purchases and cash advances. The only limitation is for the credit loan to be fully paid back at the end of set time period. If used wisely, one can use the credit card 0% interest loan to pay off higher interest rate debt. As long as you have the self-discipline in controlling spending, this type of financing can be a valuable tool for money management and budgeting.

Tracking Spending

As the credit card issuers provide detailed monthly statements on purchases, they allow you to keep track of your spending with ease. For business owners, the summaries are a valuable tool for tax return preparation, as they provide information for allowable tax deductions.

Rewards and Benefits Many companies offer rewards and cardholder benefits to their customers. Loyalty programs have been designed to encourage cardholders to use one specific card. As the card is used, the cardholder accumulates airline miles, hotel chain points, cash back points etc. that a cardholder can redeem for products or services. For those who use their cards frequently, the rewards can be quite substantial.

In addition to loyalty program rewards, cardholders also reap benefits that include complimentary car rental insurance, travel insurance or overseas health insurance.

Consumer Protection

For mail-order purchases that are not received, or turned out to be defective, the charge can be disputed with the credit card company. The burden of proof lies with the sender; therefore, the consumer has limited financial liability. Such consumer protection provided by the credit card company is not available with most debit cards or when paying cash.

Protection from Fraud

Carrying cash can be unsafe, as it can be stolen or lost. The lost cash is rarely replaceable. Instead, a misplaced or stolen credit card can simply be inactivated by the card issuer and a new one reissued. As for any fraudulent charges, they can be challenged. Upon investigation, the charges are usually forgiven or refunded.

Responsibilities of the Credit Card Holder

A Cardholder can maximize their benefits by,

  • Paying on Time – On time payment is the best way to avoid late fees and penalty interest, and at the same time, boost credit score. The simplest way to ensure on time payments is to set up an automatic bill pay system.
  • Paying More than the Minimum Due – If balance can not be paid in full, it is vital to pay as much as possible over the minimum.
  • Not Using Your Credit Cards’ Upper Spending Limit – Having the maximum amount charged can lead to recurring fees and interest expenses. Maxing out the credit card also leads to a The rule of thumb is to keep the card balance below 30% of the limit. By spreading purchases between several credit cards, you can manage the 30% limit with minimum difficulty.
  • Avoiding Unnecessary Fees – Many credit cards charge various fees: late payments, over-limit, cash advances, transferring balance or returning check. Read through your credit card agreement to be fully aware of all the fees. Avoid these transactions as much as possible.

Change of Terms and Conditions

Credit card companies frequently change the terms and conditions. Such changes often include fee structure, interest rates, billing, and other features. More often than not and to your detriment, these modifications benefit the card issuer. Be aware of these changes as it can help you utilize the card more efficiently. For example, a cash advance fee increase could prompt you to use a different card for cash advances.

As described, owning a credit card can be very advantageous. However, if not handled properly, it can become a liability, such as

  • For non-timely payments, a credit card loan carries a higher interest cost than other forms of credit
  • It can create poor credit scores due to late payments
  • It allows you to have a false sense of security thus accumulating more debt than manageable
  • It complicates your living with complex terms and conditions

It is critical to always use your credit responsibly. Credit problems such as extending credit limits to the maximum can result in a poor credit scores.

Have You Fallen For the 0 APR Credit Card Yet?

You probably have heard about 0 APR credit card? This is the most common thing that people have heard or read in the advertisements of most credit card companies. If you have been called by some bank representatives offering you this promotion, you might get lured by the seemingly juicy offer.

After all, it could be a lot of savings in the end as you no longer have to pay the APR (stands for annual percent rate). But before the bank representative gets successful by making you lured into applying for their credit card, stop there first and clear things up before signing up with them.

Credit cards with 0 APR are often too good to ignore. They usually come with the agreement that you transfer your balance from another credit card you are using and get the APR with zero interest; or you have the 0 APR on the first year of using the credit card. Added to that juicy offer, the bank will also give you fast approval, plus some other perks. Thinking you would get all tons of savings from this new credit card, before you know it, you let this representative procure your information, as well as your existing credit card information, and let them consolidate your debts to the new credit card company which offered you the 0 APR.

Now, after signing up with them, it could be too late for you. You have not learnt of the hidden charges of your new credit card, so here you are: about to receive future bills with even higher statements. This thing could have been avoided if you have been wise enough to carefully think of the offer thoroughly.

Such offers like 0 APR is indeed very interesting, but that happens too good to be true. The truth about this thing is that credit card companies typically start the offer being effective after people have accumulated so much debt from the holiday rush season shopping spree. And after this 0 APR thing has taken effective, the credit card company may cancel it at anytime of the year. The sad thing about this is, you do not normally notice that the offer is over leaving you with exorbitant prices with the statements.

Some may think the 0 APR offer lasts for years and years. But the fact is, it only lasts for six months or so, but not more than a year. And since, you do not know your 0 APR is over, you still believe you save even when the next bills are higher than the previous ones.

Another thing you should know about 0 APR is the offer which says inclusion of the amount of your balance transfer. Often, the credit card company actually applies the promotion for the purchases you made on your new credit card and not on the balance transfer. This is often something that clients overlook because it is usually not included on the flyers.

If you would not be careful enough, you can be trapped with this fraud claims. While it can be effective on the first season of using your new credit card, it will still get extremely higher and once again you will find yourself in the stream of high debts. To avoid these mistakes, make sure to read all details of their terms and conditions before signing up with them. It would not hurt as well if you can raise all possible questions in regards to the true nature of the 0 APR credit card.

Debit Cards Vs Credit Cards

A common way to prevent your credit card balances from getting any larger is to try to make all your purchases the old fashion way, with cash. An alternative to carry cash around is to use a debit card. When using a debit card you are not borrowing money that you agree to pay back at a later date, you are authorizing the store to immediately deduct the amount of your purchase directly out of your checking account. Banks across the country have been encouraging consumers to use debit cards as an alternative to credit cards promoting the advantages of a debit card over a credit card.

At first look this seems like a reasonable approach to rein in your credit card spending and at the same time eliminate the need to carry large sums of cash around. However, you need to recognize all the negatives of taking this approach before you decide to modify your spending habits in this way.

The first issue is that using a debit card doesn’t supply the same restrictions that using cash does. Remember you are making this decision to help you become more conscious of your spending with the goal of exercising greater control over your debt.

The reasoning behind making your purchases with cash is that you have limited your buying power to the amount of cash you’re carrying. If you don’t have the money, you can’t spend it. Using a debit card doesn’t have this very important restriction. You spending limit is not the amount of cash you are carrying at the time of purchase but the balance in your checking account, as well as any overdraft protection you have on the account.

If you plan on using a debit card you better keep track of the balance in your checking account at all times. The purchase you are making triggers an immediate transfer of money from your checking account into the merchant’s account. If you’re not careful you may find yourself bouncing checks that your recently wrote out as a result of a recent purchase. In reality you are not adding a true level of discipline to your spending habits when you move from a credit to a debit card.

Next there is a security concern when using a debit card. There is a major difference between a debit card purchase and a credit card purchase. In using a credit card a bank is entering into a loan agreement with you for the amount of the purchase. When you sign your name you are agreeing to the terms of the loan being offered. The bank is obligated to confirm that the person using the credit card is actually you. If your credit card is stolen and used by another person, you have little or no liability to pay the bank for that outstanding balance. Your maximum liability on a credit card that was stolen is $50.00 but it’s rare for a lender even to collect that from you. Their ongoing business relationship with you is more valuable to the bank than $50.00.

When using a debit card, an authorization is given by the holder of the card to the store to do an electronic transfer. Proof of this authorization is when the cardholder supplies the “pin”. It’s the cardholder’s responsibility to keep the “pin” private. In the event a thief was to gain access to the “pin” he could clean out your account. You are stuck with the loss.

The government has imposed an important level of responsibility on a lender when it issues a credit card. There is business relationship between the lender and the merchant making both entities responsible to you, the consumer. For example you buy a piece of furniture with your credit card and have it delivered. The furniture is damaged and the store isn’t being responsive in making the repair. Consumer protection laws permit you to dispute the purchase with the credit card company, who then withholds payment to the store until you are satisfied with the repair. Your credit card is credited with the full cost of the transaction and you incur no interest charges while the store addresses your problem. In your fight with the store to correct the problem you have a powerful weapon, being able to withhold payment.

If this same purchase were made with a debit card you would not have this weapon available to you. When making a purchase with a credit card you have a no cost insurance policy guaranteeing your satisfaction. Not something you should give up lightly.

My suggestion is to do the following. Take one credit card and use it for all your purchases. If you currently have an outstanding balance on that card concentrate on paying down the balance on that credit card first. Your goal is to have a credit card with no running balance on it and treat it as a debit card. Make all your purchases on that card during the month and pay off the entire balance when the bill comes in.

The benefits of taking this approach are:

  1. You have one less thing to worry about. Your checking account has one less way to be accessed by a thief.
  2. Should the card be stolen, your losses are minimized.
  3. You have all the consumer protections afforded to you by the government whenever you make a purchase.
  4. You don’t have to be concerned with overdrawing your checking account. All withdrawals are done when you decide to focus on paying your bills at the end of the month not every time you make a purchase.
  5. You have an accounting statement sent to you every month itemizing all your charges. This allows you to easily review your ongoing spending habits each month, making changes going forward as you see fit.
  6. When you pay off the entire outstanding balance on a credit card each month there are no interest charges. The bank that issued the card is giving you an interest free loan every month to cover your purchases during the month. It’s a nice feeling getting something back from a credit card for a change!

By taking this approach you have all the advantages of a debit card with none of the risks. What more can you ask for?