Opting for a new credit card is a decision that will impact your financial health in one way or another, so it should come with a careful analysis of your personal financial spending habits and goals. Credit cards can be useful when they are used responsibly, but they can also be harmful if proper care is not taken to use them only when it would make sense to do so.
When does getting a credit card make sense?
- If you want to build or rebuild credit history. Without sufficient credit history, lenders will likely see you as a higher risk. If you have limited or no credit, consider a secured card. To build or rebuild credit with a credit card, it’s important to make 100% of your payments on time 100% of the time, and to keep your credit utilization ratio low. The general recommendation is under around 30%, but people with high credit scores tend to keep it closer to around 10%.
- If you need help financing a purchase or paying off debt. Some credit cards offer introductory periods of 0% interest on purchases and balance transfers. If you are able to pay the debt or major purchase during the promotional period, you will have essentially gotten an interest-free loan.
- If you want to reward your spending. Using a cash back or travel rewards card responsibly can help you save money by being rewarded for the things you purchase the most (think: gas or groceries).
- If you want added payment security. Credit card issuers typically offer a zero liability policy on fraudulent credit card charges, whereas if you use a debit card attached to your checking account, there aren’t as many protections. Banks or credit unions may require written confirmation of the error and investigations can take much longer, which means your own funds may be tied up for a longer period of time.
When may getting a credit card NOT make sense?
- If you want to increase funds available to you. Generally speaking, applying for more credit to get out of debt or to make additional purchases is not ideal. If you’re using credit cards for things that you aren’t able to pay off right away, you may end up paying a significant amount of interest on those balances.
- If you’ve recently applied for a major line of credit. If you’ve recently applied for credit for something significant (mortgage, auto loan, etc.), a credit card application will add an additional hard inquiry on your credit report. This may also raise some red flags to lenders, who may suspect that you may need additional credit in order to keep up with payments on the major line of credit.
The bottom line is that you should carefully analyze your personal situation and weigh your options. Opening a credit card account could be a great step toward reaching your financial goals, but keep in mind that managing it requires diligence and responsibility.
To speak with a Certified Financial Counselor and receive guidance and recommendations on appropriate steps to take to improve your credit situation, please give us a call at (716) 712-2060. We would be happy to help!