Smart ways to use credit cards

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Credit cards have a bit of a bad reputation. Many people associate them with irresponsible spending and out-of-control debt. But credit cards can have a valid place in a healthy financial life, if you keep just a couple in your wallet and use them wisely.

Build a good credit rating
Using credit for things that you can afford and then paying the balance in full and on time every month, is a great way to build a solid credit history. Your credit card payment history is used to calculate your credit score. And your credit score is one of the key elements lenders consider when granting you a good rate on a mortgage, home equity loan or auto loan.

Consolidating debt
If you do find yourself carrying balances on high-interest credit cards, such as store cards, consider consolidating your debt onto one lower-interest credit card. This will make it easier for you to focus on paying down what you owe. However, be sure to read the fine print on the application form for a low-interest card. There may be a finite amount of time during which you’re given a low rate, and then the rate adjusts to a much higher one. If that’s the case, make sure you will be able to pay off the debt that you will be consolidating during the low-rate timeframe.

Purchase protection
Using a credit card to buy expensive, big-ticket items, such as appliances or electronics, can help protect you if the items turn out to be damaged or defective. First, you must try to solve the issue with the merchant that sold you the item. But if that doesn’t work, your credit card company can step in and investigate the situation under the Fair Credit Billing Act. If the credit card company sides with you in the dispute, you have the right to withhold payment on the item. This service is extended to online purchases made with a credit card as well, but it isn’t available for merchandise purchased with a debit card.

Credit card companies are clamoring for your business by offering all types of reward “points” for choosing and using their card. These reward programs run the gamut from travel discounts to free groceries and beyond, and they can be very enticing. While some reward programs are excellent, others use their promised rewards to take the focus off of their high interest rate. Some cards may also carry hefty monthly or yearly fees, which may cost you more than the rewards are worth. Choose your cards wisely -- look at the interest rates and fees first and the rewards second.

Know your limit
When you are issued a credit card, you're also given a credit limit. How much of this limit you utilize is a factor that's used to determine your credit score. That's why it's a good idea to make sure your balances don't exceed more than 30% of your credit limit for any particular credit card. For example. if you have a credit card with a $2,000 limit, you should aim to keep your balance less than $600, or 30% of your credit limit. Of course, it's always best to not carry a balance at all so you don't get hit with hefty interest charges. Keeping your credit charges in check and paying off all your cards in full every month will help ensure they have a positive -- not a negative -- effect on your credit rating.

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