Benefits of Using Credit Cards
One advantage of credit cards is that they help in building creditworthiness. Information about credit card usage is obtained by card companies and relayed to credit bureaus. If a person uses their card responsibly, it will enhance their credit score. Secondly, credit cards provide one with the ability to purchase something at the present time and pay at a later date, which is convenient, especially for large purchases. Lastly, credit cards offer rewards in the form of airline miles, gas rebates, and cashback.
Disadvantages of Using Credit Cards
Firstly, credit cards can push a person into debt, particularly if an individual has poor spending habits. People tend to overspend when using credit cards because the money is intangible and does not feel real, which may lead to bad debts. Secondly, credit cards typically have high annual percentage rates (APRs). This means that they attract high interest rates when monthly balances are not cleared on time. Thirdly, credit card application forms usually contain fine print that is difficult to understand. Consequently, consumers are prone to surprises when annual fees or interest rates are raised unexpectedly.
Importance of Good Credit
Having a good credit score is important to access low-interest loans, insurance discounts, and low APRs on credit cards. Firstly, good credit allows one to borrow loans for lower interest rates. This includes borrowings such as student loans, car loans, and mortgage. Next, good credit may qualify one for lower homeowner and car insurance premiums. Lastly, a good credit score lowers a person’s APR, meaning that they will pay less interest on their credit cards. In general, people with good credit are deemed to be creditworthy and hence pay lower insurance premiums and interests on loans.
Steps to Build Good Credit
I will build good credit by obtaining a credit card and using it for small purchases and recurrent monthly expenses. I will then pay my balance in full each month to show that I am responsible borrower. Additionally, I must ensure that I use less than 30% of my available credit to boost my credit utilization ratio. I can also ask someone with good credit to add me to their credit card account as an authorized user, which will enable me to improve my credit score by piggybacking off theirs. Ultimately, building a good credit involves monitoring my borrowing and spending habits.