Financial Education E-Book.
Copyright © 2021. Financial Education USA. All rights reserved. 

Using Your Credit Cards

Credit cards got their start in the early 20th century as a status symbol. In 1970, only about 16% of all people in the United States held credit cards. Today, 183 million, or 70% of Americans have credit cards.  
 

On average, these Americans carry a credit card balance of over $5,000

As a financial instrument, credit cards have arrived.
 

However, carrying a balance this large wasn’t always the norm for credit cardholders. In the 1950s, the credit card. The card allowed people to pay for their meals and other items on credit.
 

Back then, cardholders were also expected to pay the card’s balance in full by the next statement period. Today’s cardholders are much different: 55% of them do not pay their cards in full each month.
 

How Your Credit Cards Affect Your FICO Score

For many people, using credit cards is an important part of life, and indeed, an important part of their credit score. According to a national financial website, your payment history accounts for 35% of your FICO score.
 

This means that your ability to get a good credit score comes from your ability to pay your bills on time. The national financial website also points out that if you’ve never paid any kind of payments over time, you don’t have bad credit. In fact, you don’t have credit at all. So in order to build credit, you have to have credit. If you don’t have credit, you won’t have the opportunity to build it. To help consumers overcome this dilemma, credit card companies created secured credit cards. (Incidentally, those who have bad credit can use a secured card in a similar fashion in order to rebuild their credit scores.)
 

A secured credit card is a card that has a deposit backing it. You provide the deposit to the credit card company. After using the card and paying back the money you’ve borrowed, you eventually build up your credit score. There is no liability for the card company because the card is secured by your money.
 

The idea behind having a secured card is that eventually, your credit score will be good enough for you to qualify for an unsecured card. This is a card that is backed by your good credit history. There is no physical collateral required for this kind of card. If your credit score is high enough, then your line of credit could be increased, allowing you to take better advantage of your credit card’s revolving line of credit.

Getting Cash Back, Travel Rewards, and Other Benefits

According to an article on a major news website, 49% of people who have credit cards with a rewards program have redeemed these rewards to the tune of $1,051. Yet, even with this kind of money on the table, a full 19% of reward cardholders do not use their reward at all.
 

This isn’t to say that people who have a travel rewards card should use it irresponsibly. They shouldn’t: They should still plan on paying their cards off in a timely fashion. However, many cards offer gas rebates, frequent flyer miles, hotel vouchers, and other freebies that reduce the price of travel for those who know how to use their cards wisely.

However, given that many rewards cards usually come with a higher interest rate, it’s best to take the debit card approach to using them. That is to say, use your cards, but plan on paying the balance in full each month so that you can avoid interest rates.
 

You may also find that using cards that offer other kinds of rewards is better for you than those that only offer travel rewards. Nowadays, it’s possible to find rewards cards that allow you to save money at major stores.  
 

If you use these kinds of reward cards, then you can redeem their points for items, like food and beverages, home construction projects, clothing, and other everyday things. When you pay your credit cards off each month, these rewards then become free money for you.
 

Avoiding the Credit Card Trap

Surprisingly, not all credit cardholders hold a balance. While many cardholders carry a balance from one month to the next, the majority do not, according to another article from a major news website.
 

The ones who did not carry a card balance were able to pay their balances off each month, which means they were able to use their credit cards as the original 1950’s credit card was intended. They don’t spend money if they don’t have it.
 

Additionally, responsible cardholder don’t use more than 25% of their line of credit. Anytime your balance moves closer to its limit, you send a signal to your credit bureaus (and other potential creditors) that you’ve overextended your budget.
 

It’s also important to find out if your credit card company offers a grace period. If you haven’t paid your card by its due date and your card company offers a grace period, then you normally won’t be charged interest.
 

Using Your Credit Cards the Right Way

So just how do you go about using your cards in a way that allows you to both redeem rewards and remain financially responsible? The answer is to create a budget.
 

Part of the reason why people use their credit cards so much is because they haven’t budgeted for their expenses. If an emergency comes up, rather than pulling money from a savings account that they keep just for emergencies, they put the emergency on their card instead.
 

Many people who have a great deal of debt have never been taught how to manage it. They have never been taught that it’s best to put a little money aside each month to pay for expenses, like home improvements, car repairs, entertainment, and the like.
 

For people who can keep a budget, credit card expenses don’t pose a problem. They’ve already put money away to pay for their credit card purchases, just as they would if the card had been a debit instead of a credit card.
 

Then, once the credit card bill comes in the mail, they pay it off using the money they put aside for that purpose. This allows them to use their revolving credit lines responsibly and to reap the rewards that come with some cards.
 

The Future of Credit Cards

New technologies impact everyone and everything, including credit cards. A recent study says that 65% of those polled foresee a move away from credit card usage and toward mobile banking by the year 2020.
 

Whether that means that credit cards will disappear all together or whether they will continue to exist alongside new payment methods, like mobile technologies remains to be seen. What is likely, though, is that people will continue to use credit in some form or another, which means the principles of using credit responsibly should still be exercised in the years to come.