More than three-quarters of American adults have a credit card, creditcards.com reports. What's more, the average consumer has three credit cards with an average balance of $5,525, according to Experian.
Credit cards serve a myriad of purposes—providing a way to consolidate expenses, establish or build credit, earn points or rewards, make a big one-time payment without impacting cash flow in the short term, and more. Credit card spending can also bring with it a host of ingrained reflexes and assumptions, depending on your history with the powerful piece of plastic. You may feel excitement at the new world of possibilities that opens with a swipe, tap, or click, or you may feel anxiety about mounting debt and compounding interest—and sometimes, both.
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"Using credit cards can be very advantageous for individuals," says Danielle Harrison, a Missouri-based financial planner and founder of Harrison Financial Planning. "On the other hand, there are also the downsides of credit cards. If used improperly, credit cards can wreak havoc on the cardholder's financials."
The good news is that there are healthy habits you can develop to use credit cards wisely, safely, and even to your advantage. Follow the expert advice below to build a more responsible and financially stable relationship with credit cards.
Mind your card balance
Credit cards can influence increased spending, explains Jamie Hopkins, Nebraska-based managing partner of wealth solutions at Carson Group.
"It is easier from a behavioral standpoint to overspend since debit cards have natural limits," says Hopkins. With a debit card, your cap is how much you have in the bank. With credit cards, however, your ceiling is your spending limit, which may be much higher than you can reasonably pay back. Plus, it's easier than ever to impulse purchase that new hat or bag or concert ticket with a single click or tap online.
That's why it's critical to be vigilant about purchasing decisions and balances. Staying on top of what you charge on your card is important, as interest rates can be quite steep—16.58 percent on average, according to creditcards.com. That's why credit card best practices call for paying off your balance in full each month to avoid the slippery slope that is mounting credit card debt.
"Because of the high interest rate that is associated with most credit cards, balances not paid in full will incur steep charges that can ultimately be hard to get yourself out from under, particularly if you didn't have a strong financial base to begin with," says Harrison.
Some larger, one-time purchases can take an extra month or two to pay off, but "that should be the exception, not the rule," she says.
Know the power (and limits) of credit cards
Among the benefits of using a credit card for everyday purchases is the ability to track spending and cashflow. "Because credit cards provide detailed reports on where and how much you spend, it can actually make budgeting easier than using cash," says Hopkins.
If you use one card for all purchases—including recurring, monthly bills—then spending becomes simpler to track. Just make it a daily habit to check your credit card balance so you know what you've spent, what's pending, and when your bill is due.
It's also critical to understand where credit card benefits begin and end. Credit cards are not great resources for paying for things like school tuition, medical bills, and other large or recurring expenses that cannot easily or quickly get paid off. So, avoid putting that big family vacation on the card if you don't have the cash on hand to pay it back. The last thing you want as remnant after that amazing Hawaii getaway is an interest-laden looming credit card balance.
For those who have a hard time paying off the monthly balance, a moment of self-reflection is in order. Sometimes the sting of seeing how much extra you are paying in interest for rolling credit card balances is enough to help. For others, resources like a financial therapist or financial planner can help identify spending habits and potential opportunities to improve, suggests Harrison.
"Despite the benefits of using a credit card for purchases, for those who are unable to consistently pay off their credit card balances in full, using a debit card or cash is a more prudent way to limit your spending," said Harrison.
Leverage your card benefits
In addition to the flashier perks of credit card usage—including rewards points and benefits like airport lounge access, pre-sale and early access to key cultural and entertainment events and opportunities—there are other, lesser-discussed and sometimes unrealized benefits that can help protect you and your finances.
Many credit cards offer fraud monitoring and protection so you can ensure your card and identity are not stolen, an act that has the potential to wreak havoc on your credit and even your identity documents.
"It is fairly easy to catch credit card fraud on your account, report it, and get coverage—and the [credit card owner] is usually not responsible for any of the fraudulent charges," says Hopkins.
Even lesser known, but valuable, many credit cards also offer other perks such as price protection, extended warranties, and additional travel benefits, like rental car insurance, travel protection, roadside assistance, and more.
Knowing what's available to you with your credit card benefits can help safeguard your financial health and save you dollars and cents on items you might normally pay for out of pocket.
Rinse and repeat
Credit cards are useful tools for everything from consolidating and tracking spending and budgeting to establishing credit for future auto, home, or other larger purposes, to monitoring for fraud, advantaging benefits and perks that would otherwise cost you—and more.
Once you build healthy credit card habits through active monitoring, clearing the balance each month, and taking full advantage of benefits, credit cards can become a tremendous asset rather than liability in your financial identity. As with many other lifestyle habits, establishing and sticking to a routine is key to healthy credit card use, too.