It’s November, and the season of thanksgiving is upon us. I enjoy hearing what people are grateful for — family, friends, health, homes and careers. Those are all certainly on my gratitude list, but as the weather turns colder, I am reminded of a conversation I had with a customer last year, one that prompted me to be thankful for another item: credit cards.
I know that’s unusual. I’ll explain.
On a cold day last winter, a customer came to the Bank. His furnace had broken and needed to be replaced. An unexpected, costly expense, his first question was, “How am I going to pay for this?” He was working to build his savings and didn’t want to dip into that account just yet, but he couldn’t pay the full cost out of his regular spending budget either. He needed to somehow split the cost of the furnace up into manageable payments.
The solution: finding a credit card that aligned with his financial goals.
Before choosing a credit card, it's important to consider how it fits into your overall financial picture. This particular customer was working to build his savings and wanted to approach this unexpected expense thoughtfully. His biggest concern was avoiding interest charges while still being able to spread the cost of the furnace over time. A card with a 0 percent introductory annual percentage rate, or APR, for 20 months aligned well with those goals.
We also discussed a repayment strategy that would allow him to pay off the furnace well within the introductory period and avoid paying interest.
4 Ways to Use Credit Cards
When used intentionally and responsibly, credit cards can be valuable financial tools — as my customer can personally attest to from his warm home. A number of different types of credit cards (sometimes an overwhelmingly large number!) are available these days. They can be used to:
- Finance purchases
- Build credit
- Earn rewards
- Pay down debt
While you don’t have to know everything about every card on the market, it’s important to know the basic types, so you can decide which one best fits your financial goals and spending habits.
3 Types of Credit Cards and How to Use Them to Your Advantage
In general, credit cards typically fall into three different categories.
1. Cards that save you money on interest.
A card with an introductory 0 percent APR and ongoing low interest can be a good fit if you have an emergency, like a furnace breaking in winter, or if you have fluctuating income and carry a balance occasionally from month to month.
These types of cards can also help you pay off a high-interest debt, interest-free, by offering the same introductory terms on balance transfers from other cards.
Keep in mind: These cards may be difficult to get if you have a below average credit score.
2. Cards that help you earn rewards, like points or cash back.
A rewards credit card can be a good fit if you want to put your spending to work. Some rewards credit cards offer points to redeem for merchandise, travel or cash back; others help you earn cash when you make purchases in specific categories.
While these cards usually have a higher APR, if you pay off your balance in full every month, you won’t incur interest.
Keep in mind: These cards may make it more tempting to make purchases. Be careful and only spend what you can afford to pay back each month. And always remember to redeem your rewards. Those are what make these cards beneficial.
3. Cards that help you improve your credit when it’s limited or damaged.
A secured credit card can be a good fit if you need help establishing, strengthening or rebuilding your credit.
This type of card is backed by a cash deposit you make to open the account, usually $200 or more. The deposit is typically equal to your credit limit, so if you deposit $200, you'll have a $200 limit.
Keep in mind: These cards often have higher APR than other types of credit cards. That means you must be careful to pay your balance in full every month, on time, so you don’t get charged interest or fees.
Some Final Advice
Credit cards often have a bad reputation. I’m sure you’ve heard credit horror stories yourself. But, as you can see, credit cards can help you in times of need and can also help you build credit and get great rewards. Just remember, before you ever apply for a card, set solid spending rules for yourself. I strongly recommend you only charge what you know you can comfortably pay back every month. You can use the financial tools in online and mobile banking to help you determine what that amount is.
As I mentioned earlier, there are hundreds of credit cards available these days, most of which arrive in your mailbox. Be careful with any offer, and always read the fine print to look for fees, rates and terms. If you’re thinking of applying for a card, I urge you to go to a bank. A banker will not only show you what cards they have available, they’ll also help you understand the card member agreement.
Most importantly, they’ll make sure the card you choose is one you can be thankful for — because it fits your financial goals.
This blog was written by a former Banking Manager at Bank of Utah’s Redwood Branch.
