Making monthly credit card payments, depending on the card, can be a difficult task—especially for people who have a problem budgeting. Getting out of credit card debt can be even harder. When faced with a monthly repayment you’re unprepared for, you might start to feel the pressure of having a credit card. Credit cards can provide their owners with many options, but some may cost you.
If you used your card to take out a cash advance or wind up with a card that has a high interest rate you can’t really afford, you may end up paying more than if you’d used something like a payday loan.
1. Secured credit cards
These are ideal for people lacking a credit history or who might have poor or damaged credit. They work by requiring the user to pay a security deposit equal to the credit amount. This way, the company is assured that no matter what, the card will be paid off if the user spends everything. To continue using the card, payments would still need to be made on a monthly basis.
Secured cards typically feature low credit lines and additional fees, such as an application fee or monthly processing fee. This kind of card is useful for rebuilding or establishing credit because there is collateral (the security deposit) to protect you from accruing credit card debt as you use it. In many cases, companies who offer a secured card will report activity to one of the three credit bureaus, so making timely repayments will help your credit score.
Repayment Tip: Since the credit limit is smaller, it’s great for smaller purchases that you can pay off easily, building your credit up gradually. Using a secured card to pay monthly bills can be a smart way to not only cover your essentials, but to use the card in a controlled way. You’ll pay your bills on time and build credit while you do it—as long as you make your monthly repayments on time!
2. Balance transfer credit cards
Most credit cards give users the opportunity to transfer the balance of one card to another, but a balance transfer credit card provides a much lower introductory rate. This makes it a more cost-effective way to paying off a large balance. The lower introductory rate is generally promotional and ends after a certain period, so these are only ideal if you know you can afford to pay off the balance before the promotional period ends.
Repayment Tip: This could be a smart way to make the last big payment on a lingering debt. If you have the money, or know you’ll be able to afford paying the entire balance off before the card’s introductory interest rate expires, look into balance transfer credit cards.
3. Rewards credit cards
Rewards cards are very popular with purchase-happy consumers. These credit cards offer incentives and rewards to users who make frequent purchases with the card. The card keeps a tally of points that are accumulated for every dollar charged to the card; and these points can later be redeemed for rewards. Common rewards include cash back or other cash rewards, airline miles, merchandise, discounts on gas, retail discounts, and hotel/travel points.
While the rewards aspect may make these cards seem very appealing, they won’t be the right credit card for everyone. Their fees and interests rates will vary and it’s important to make sure the rewards card you’re interested in is one you can afford to maintain. If yours features high interest rates and annual fees, or a complex redemption policy, these cards may ultimately cancel out any rewards you might be eligible for.
Repayment Tip: Consider these cards ideal for monthly expenses, like groceries and utilities. Depending on the terms of the reward program, you might still accumulate points with these purchases that will let you reap the benefits of such a card without enticing you to overspend just for the rewards. Only take out a rewards credit card if you’ve read all of the fine print and understand the incentives program, or else you could end up with high interest rates/fees but few rewards.
4. Standard credit cards
These are your basic credit cards. They don’t offer rewards or any special promotions, which means they’re easy to understand. These credit cards features a revolving balance up to a specific credit limit, usually determined by the lender. The cards charge fees for late or outstanding monthly payments, and they have a minimum payment you must make to avoid late fees.
Repayment Tip: Remember that credit cards are best used for emergency purchases, and expenses that are better paid off over time than in one lump sum that might deplete your bank account. A standard credit card usually has fewer hassles, which makes it mildly safer for use with more regular purchases so long as you can afford to make the minimum monthly payments on time.
Credit cards are essential in helping you build a good credit score, but they can become financial burdens that encourage some users to go into debt if not used wisely. A credit card used effectively allows you to establish a better credit rating while paying for the things you need, without causing you to accumulate too great a debt. Most small purchases, and even some larger ones, can be paid off relatively quickly when you spend inside your limits. Relying on credit when you don’t have enough in your checking account to back it up is a surefire way to find yourself in financial trouble.