Credit cards: Friend or foe?

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THE BACKGROUND:

Credit cards can get a bad rap. But because I’m in the habit of always paying off my balance each month, I’ve never seen their malicious side. I have friends who have sworn off them altogether, or are still paying off substantial balances due to years of mindless spending. It’s an easy habit to fall into. In fact, Americans piled on more than $2.2 trillion in purchases last year.1 But as the Fidelity Viewpoints® article “7 Steps for Using Credit Cards Wisely” reveals, when used judiciously, credit cards can actually be a powerful financial tool.

THE BREAKDOWN:

1. Build your credit—but be smart about it.
Just because you have a $10,000 credit limit at your disposal doesn’t mean you should spend it all in one swipe—especially if you can’t afford to pay it off. Fidelity suggests that your total monthly debt payments, including your student and car loans, mortgage and credit card payments, shouldn’t account for more than 20% of your income.

2. Check your credit report regularly.
It’s what forms the basis of your credit score, which can play a major role in how much lenders will lend you, and how much interest they’ll charge. By regularly reviewing your credit report, you can keep yourself honest about how much you owe, how consistently you’ve been paying your bills on time, and what types of credit you use. Tip: Start by getting a free copy of your credit report here.

3. Stay in control.
Keeping your debt lower than your income and making on-time payments can make you look more attractive to lenders, but they aren’t the only things they look at. Your credit history—which is a record of your ability to repay debts—can also have an effect on your credit score. While a bad credit history never fully disappears, improving your credit score over time can also help you clean up a rocky one.

4. Read the fine print.
Interest rates and fees vary by credit card. To keep yourself safe, choose a card with rates and a fee structure that align with your habits. For instance, if you’re planning on carrying a balance on your credit card and paying it off over time, lower-interest credit cards might be for you. Alternatively, if you’re confident that you can pay your balance off each month, you may benefit from a card that offers points or rewards and carries a slightly higher interest rate.

5. Play it safe.
Credit card fraud and identity theft can be a hassle. Protect yourself by regularly checking the charges on your monthly statements—and contact the credit card company immediately if you notice any unusual activity. (No, I did not purchase a $3,000 riding lawn mower, thank you very much.)

6. Reward yourself.
Many credit cards give you points toward airline miles, restaurants, and even cash rewards. If yours is one of them, take advantage. You’re spending the money on things you need anyway—you might as well try to earn a free trip to the Bahamas while you’re at it.

7. Pay it off.
Obviously, the faster you’re able to pay off your balance, the less it’s going to cost you. But if you can’t afford to pay off the full amount each month, come up with a plan that works with your budget. Thanks to the Credit CARD Act of 2009, your statements now show you exactly how long it will take you to pay down your balance if you make only the minimum payment. Use that as a starting point, and go from there.

THE BOTTOM LINE:

Before you pull out your plastic and start spending with abandon, take a good hard look at what this week’s object of desire is really costing you. Because used strategically, credit cards can go from being a two-faced enemy to a smart financial ally.

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1. Nilson Report, 2013.
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