Cash back and gift cards are benefits of credit card use. But watch for these dangers

Credit cards are a valuable resource, providing responsible spenders vast rewards, including funds for emergencies, travel points and cash back. When used wisely, credit cards can also increase your credit score and help you keep your finances on track.

Here are three things to ensure your credit card is working for you:

Understanding the basics

A credit card is a line of credit loan used to make purchases and pay the bill later, unlike a debit card that’s used to deduct funds directly from your checking account at the time of purchase.

Credit cards can be valuable financial tools that help the card user earn rewards, keep cash transactions to a minimum, build credit and better protect you from fraud. However, if not used wisely, individuals may fall into debt by overspending and making purchases they cannot afford.

Accumulating debt on a credit card can quickly become overwhelming as some cards charge high-interest rates on money borrowed — some up to 22%.

You can apply for a credit card online, at a bank, by phone or by mail. The card issuer will use your social security number to check your credit score when you apply. Your credit score will then determine whether you are eligible for a line of credit, as well as the credit limit you qualify for.

A credit card limit is the total amount of money you can charge to a card at a time. A good credit score typically allows for a credit limit of anywhere from $1,000 up to $20,000.

Once you begin using your credit card, your monthly payments will begin. While you can always pay the total balance on the card to avoid interest, you must pay the minimum each month. You should pay on time, otherwise you may face late fees and penalties that will negatively impact your credit score.

Advantages of using a credit card

Spending money with your credit card and making on-time payments is an excellent way to build your credit score. A good credit score enables you to make more significant purchases, like taking a loan for a home or vehicle, as you are seen as creditworthy.

While making purchases you can’t afford can be dangerous, having a credit card for emergencies like car services, home repairs or unexpected medical bills is helpful. Individuals can take advantage of paying for something they need now and footing the bill later instead of using a debit card and facing overdraft fees — or being unable to afford this emergency bill.

While financial institutions offer varying credit card benefits, CommunityAmerica provides a variety of rewards such as cash back, travel points, merchandise rewards and gift cards.

Credit bard best practices

Healthy credit habits can save you money and stress down the road. Always make minimum payments to avoid penalties, fees and accumulated interest. Making more than your minimum payment will save you money on interest, improve your credit score and shorten the amount of time you owe payments.

Research your options if you are considering opening your very first credit card. Several banks and credit unions offer first-time card benefits such as lower interest rates and no annual fees. In your first few months, use your credit card for things easy to track and factored into your monthly budget, such as gas and groceries. This will help you get a feel for using your new line of credit.

You must understand the interest rate on your credit card as this will affect your monthly payments if you do not pay your balance in full. This added cost can make a significant difference in what your borrowed money will cost you.

Continually educate yourself on credit card best practices to help you make informed, thoughtful decisions regarding your credit. Always stay on top of your payments and monitor your credit score to ensure you are using your card in a way that truly benefits you and your financial goals.

Let’s Talk Money is powered by CommunityAmerica Credit Union. This week’s feature comes from Financial Well-Being Coach Janelle Holland.

This story was originally published December 7, 2022 at 6:00 AM.