Credit Cards Explained: Beginners Guide to Enhancing Your Credit Score and Choosing the Best Option For You

Last Updated on July 12, 2021

MyFinancialTimes is a reader-centric site. We may receive compensation from the products and services we mention or recommend in this story, but the opinions are the author's own. Remuneration may impact where offers appear. We may not include all available products or offerings. To learn more you can visit our advertising policy and editorial policy.

Credit Cards aren’t taboo and they certainly don’t ruin your credit score. If used right, that piece of plastic can help you achieve financial independence and even save a pretty penny compared to alternative payment methods. Used with caution and care, credit cards can take up prime real estate in your wallet.

How They Work

Credit cards loan you funds each month depending on your spending habits and card limit. You don’t need the money in your account to place a charge, though you’ll be charged high-interest fees if you don’t pay the credit card company back at the end of the month. This can add up quite a bit if used irresponsibly, but in the right hands, credit cards can do wonders for your finances.

Enhance Your Credit … Score!

Credit cards are an essential first step in building credit. You can’t just jump out of your parents’ home and take out a mortgage! You’ll need to prove that you can handle debt in a responsible manner, first. The saying is “walk before you can run.”

From weekly grocery shopping to one-time mall trips, using credit cards as early as possible can build a killer credit score that will make loan applications a piece of cake. As long as you’re spending less than you can afford, and you pay off that debt every month, your score will see green in no time.

Start Off Strong

If credit score increases aren’t enough to convince you, credit cards occasionally come with great sign-on bonuses to incentivize opening an account. Though not all cards do, some will offer gift cards or cash rewards when you sign up.

You don’t want to go crazy opening all sorts of credit card accounts for the sake of the bonuses (even though it’s certainly tempting), however, choosing a few with valuable incentives can be a smart choice. Amazon Prime Visa is one example, which offers an Amazon gift card for Amazon Prime members who sign up for their card.

Rewards For Good Behavior

On top of sign-on bonuses, credit card companies often offer cashback incentives each month when you pay off your statement. The trend hit the mainstream after Discover offered its nifty 1 percent cashback bonus, and rewards have hit new heights.

Most credit cards offer 2-3 percent cash back on purchases, and some cards go even higher when your card is used at specific vendors. Cashback beats debit card purchases because it rewards you for using your credit card. As long as you pay it off on time, the bonus can only work in your favor.

Credit cards can be your best friends if you know how to use them. With the right strategy, they can make you financially independent!
Credit cards can be your best friends if you know how to use them. With the right strategy, they can make you financially independent! Photo Credit: Shutterstock

Frequent-flyer miles are also another popular incentive for credit card owners. Most major credit card companies offer programs through airlines, rewarding you in miles for spending. This works doubly when you spend on airfare! Some cards even offer 50-100 percent off an airline ticket if you meet the card’s initial spending requirement. The Bahamas are only a few swipes away.

Safe, Secure, and Scam Free!

While debit cards can be convenient, they’re often a gateway to scams that can be easily avoided with credit cards. Credit cards have safety nets to combat fraud if someone skimmed your number and used your card to make purchases. Security measures such as swipe alerts and GPS tracking on purchases can make detecting fraud quick and simple.

Also, since the money isn’t taken directly from your account, credit cards are the safer way to make purchases. If something doesn’t look right on your statement, let your credit card company know before you pay your bill, and they’ll handle the charge. Though it’s sometimes a hassle to freeze your card, it’s better than seeing that money slip from your account and be gone for good.

Vender Assurance

Since credit cards often have a holding period for funds, they make a great vendor assurance plan. Say you just had your roof done, credit cards may be the better choice when paying the contractor. If things don’t look right once the job is done, you can simply cancel the charge. The company will be kept accountable for doing a good job. If tiles begin to slip off your roof or things don’t look as stable as they should, call your credit card company and have them cancel the charge. The roof company will come back to fix the job.

Universal Acceptance

Everyone wants to be accepted, but not all payment methods are built the same. Due to Covid-19, cashless-only payments are becoming a real problem for cash users. Credit cards are accepted virtually everywhere, even more than debit cards. Make sure you’re never caught without payment.

Fewer Fees

Some credit cards come with fewer fees. Overdraft, low funds, and individual transaction fees are strictly debit card issues. Though some credit cards come with annual fees, most have scratched that fee, too. Compared to most debit cards, credit cards have a leg-up when it comes to fees, as long as you make your payments on time!

Credit cards can make or break your finances. With the right strategy and timely payments, credit cards can minimize fees and maximize financial security. From managing your credit score to earning monthly incentives, credit cards can be the best payment method.

Reminders

Once you’re convinced that credit cards are advantageous here’s how to make the most of your new piece of plastic.

Step 1: Do your research. Figure out which credit card is right for you by understanding their rewards program, cash-back offers, and annual fees.

Step 2: Open a credit card account. Decide which card is right for you based on your current credit score and spending habits. The lower your score, the lower the spending limit.

Step 3: Budget! Before you start spending, figuring out how much you can (based on your salary, investments, and other monthly income). Do this before you start spending to ensure you don’t overspend on your first month. Make a habit of underspending and paying your credit card on time for every payment cycle.

Step 4: Set up auto-pay. If you have a connected bank account, set up auto-pay to make sure you never miss a payment. Just make sure you have the money in your account each month, so you don’t face overdraft fees.

Within a few months, you’ll get the hang of your credit card and earn rewards to spend on fresh new bling!