+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

A simple question can help you figure out whether you should get a credit card

Jul 5, 2016, 22:34 IST

Credit cards are a hot topic.

Advertisement

Some people swear by them. Some people swear against them. And some are left in the middle, torn between "You need to build your credit score!" and "Credit cards will lead you into debt!"

You can get swept up in airline miles and APRs and store cards, but when it comes down to it, there's only one question that determines whether you should have a credit card:

Can you be trusted with it?

If you see a credit card and think, "free money!" or "a lifeline!" you're headed down a dangerous path. A credit card is a physical manifestation of a credit line. Your issuer says they'll lend you, let's say, $10,000 a month, and you take them up on that loan in small increments every time you swipe.

Advertisement

But you don't eat a whole cake when it's in front of you. You don't buy a house that costs every cent of the mortgage the bank will offer you. You don't drink the entire bottle of whiskey when it's resting on the bar. Just because your credit card issuer will lend you $10,000 doesn't mean you have to spend it.

And in fact, you shouldn't spend it. Not to get too technical, but a majorly influential factor used to calculate your credit score (those three pesky numbers that determine whether anyone will give you a large-scale loan like a mortgage) is called your "utilization ratio": how much of your allowed credit you choose to use.

You want to use as little as possible. In fact, people with the highest credit scores tend to use less than 10% of their allowed credit, John Ulzheimer, credit expert at CreditSesame.com, told Business Insider. For a $10,000 limit, that's $1,000. Hardly a spending spree.

If you cannot pay your monthly bill in full, you are using your credit card to spend money you don't have. That's called living beyond your means, and it's a fast-track to debt. Credit card debt is infamous for being extremely expensive and destructive, and you can't argue in favor of it like you might student loans or a mortgage. There's no upside to credit card debt.

If you're worried that sounds like you, an option is a secured credit card, which requires a "down payment" from which you spend via plastic, as a just-in-case policy for the credit card company should you be unable to pay your bill. It's still a (more controlled) way to build your credit score. NerdWallet has a few good recommendations for secured credit cards.

Advertisement

Or, if you're cautious but not terrified, you can get a credit card that you leave in a drawer. Attach that card to a single fixed, monthly automatic payment like your cable bill, set up another layer of automatic payments from your checking account to your card to cover that one monthly bill every 30 days, and let the credit card operate on its own while you go about your life.

You'll still want to pop in regularly to make sure it's both secure (remember, a thief wouldn't necessarily need your physical card to steal its number) and operating as expected, but it's a low-impact and minimal temptation way to keep a card.

Credit cards are surrounded by a murky haze of get-the-best-score myths, but the simple and boring truth is that the best thing you can do for your score and your peace of mind is to use your credit card essentially as a debit card: Swipe it to pay for things you can afford with money that's in your bank account and use that money to pay your bill every month. Over time, your score will climb and you'll be able to add in more cards, which builds your score further and presents a whole host of new, potential perks.

But before you sign on the dotted line, it all comes down to one basic question that requires a little self-reflection: Can you be trusted with a credit card?

NOW WATCH: Here's why the most popular map of the world is totally misleading

Please enable Javascript to watch this video
You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article