Credit cards are awfully tempting.
Hand over your card, get your new car/designer jeans in return, and your wallet stays just as full as it was before you made your purchase. Who can resist?
Not all of us: According to a nationwide survey by LearnVest and Chase Blueprint, the average respondent had $5,000 in credit card debt and confessed that that debt was the biggest obstacle standing between her and her financial goals.
But there are also plenty of people who use credit responsibly: They’re men and women out there, living below their means, who own a few credit cards and rarely if ever carry a balance from month to month.
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And, when used that way, a credit card can be a very good thing indeed. In fact, credit cards can actually benefit your finances in a few different ways, from helping you budget to scoring you free stuff, just for paying with them.
To see exactly when a credit card can help you, read on.
1. Protecting Your Accounts
One nice thing about using a credit card is that it keeps an electronic record of your activity. This comes in handy both when you want to track your spending to stick to your budget, but also when something goes wrong—say, your card is lost or stolen.
Credit cards have a few built-in protections that cash (or checks) don’t. One of these is fraud protection—most cards won’t hold you accountable for purchases made with your card by someone other than you. Plus, it’s much easier to call and cancel or freeze a credit card than it is to cancel checks and change your bank accounts, or bid adieu to your cash for good.
2. Improving Your Credit Score
Your credit score, which is a number between 300 and 850 that serves as an indicator of your trustworthiness to lenders, is based on how reliably and consistently you use credit. It’s not calculated simply by having a card (although that is part of it). The score is calculated from six different factors, which represent different types of credit behavior:
- Percent of on-time payments
- Open credit card utilization
- Derogatory marks, such as accounts in collections or bankruptcies
- Average age of open credit accounts
- Total number of accounts
- Total hard credit inquiries