Should you pay with cash, debit, or credit? While credit cards can offer a necessary cushion during an emergency, they can also be a helpful way to establish or rebuild your credit, finance larger purchases, and even pay down high-interest debt. Nevertheless, if you or someone you know has experienced anxiety from credit card debt or dealing with aggressive lenders, you may feel cautious about using your available credit — especially during uncertain times.
Read on for four tips that will help you understand when it can be advantageous to pay with credit, along with a few smart strategies for borrowing money when you need to.
Use credit to purchase items you’ve already budgeted for
Rather than using your credit card for anxious or unplanned spending, you can view paying with credit as a way to meaningfully build or rebuild your credit history. While emergencies do happen, the best things to purchase with credit are things you had already budgeted to buy. Rather than paying in cash or with a debit card for items within budget, charge them to your card and pay them off in full at the end of each month to start building a responsible credit history.
If you do need to use credit during an emergency, it’s important to view your transaction as a loan you’re taking out that you’ll need to pay back — with interest. When using your credit card as your emergency fund, take time to shop around for the best rates and compare prices. Finding a less expensive solution will make it easier to pay off what you borrow more quickly, which may cost you less in interest charges in the long run.
Pay down high-interest debt
The concept of using a credit card to pay down high-interest debt may seem counterintuitive, but transferring a balance to a card with a low or no-interest promotional rate can be a smart way to pay down your debt.
Do your research before you complete a balance transfer. Some card issuers charge fees (generally 3% to 5%) when transferring a balance from another credit card, while others have very specific terms and conditions. Cards with a 0% APR introductory rate, no annual fee, or a 0% balance transfer fee present the best opportunities for paying down high-interest debt.
Most balance transfers can be done online or over the phone. You may also be able to move your debt with a convenience check or a check the credit card issuer will mail to you. Your balance transfer may take a couple of weeks, and once complete, will show in your new account. Once you’ve transferred your debt, be sure to pay down the balance as quickly as you can and within the terms of the agreement to avoid being hit with high interest rates on any remaining balance after a promotional period ends.
Spend below your credit limit
Staying within your credit limit will keep your account in good standing, and maintaining a low credit utilization ratio — the number that shows the ratio of what you owe compared to your credit limits across all of your accounts and cards — can help boost your credit score.
On the other hand, maxing out your credit card will result in a high utilization ratio, and can negatively impact your score. A good rule of thumb is to keep your credit utilization ratio below 30 percent, and keeping your ratio under 10 percent is even better.
Make timely, consistent payments
Your payment history is another key factor that impacts your credit score. Late monthly payments not only result in fees, but also negatively impact your credit. If you’re struggling to keep track of your bills, scheduling online auto-payments is an easy way to make sure you pay on time each month.
In addition to making timely payments, paying off your balance in full can help you avoid high interest charges. If you’re not able to pay your credit card balance in full, pay as much as you can — even if it’s just paying the minimum amount on time. If you’re unable to pay, contact your card issuer to find out which assistance programs are available.