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Credit cards are often associated with spending and debt, but they can also be a primary element in your financial planning. The key is to use credit cards responsibly, and to choose the best credit cards to meet your needs.
You can start by evaluating both your short-term and long-term financial plans, and taking a closer look at how your credit cards can play a role in achieving your goals.
Your short-term financial plans are those that involve the next few months. When using credit cards for short-term plans, you’ll want to establish a monthly budget, and perhaps even a weekly one.
Your credit card can be a helpful tool in budgeting as you can use it to track and categorize your spending. For example, most credit cards will allow you to view how much money you spend in certain categories, such as gas, groceries, travel and entertainment. Just be aware that some merchants aren’t categorized to reflect the kind of purchase you actually made.
Also, be sure to make your monthly credit card payment on time. Ideally, you’ll want to avoid interest charges by paying your statement balance in full. Other short-term planning strategies for your credit card can include using your credit card rewards to pay for everyday purchases.
Credit cards can also be a useful part of long-term financial planning. For example, several credit cards are co-branded with investment companies that can channel your cash back rewards into your retirement savings account. The reporting features that credit cards offer can also assist in accounting and tax preparation. This is especially true for small business owners who use a credit card that’s dedicated to their business expenses.
Another way credit cards can be part of your long-term financial planning is by using cards to pay medical bills. By their nature, most medical bills are unplanned, and having a credit card can allow you to pay these bills without having a large amount of cash on hand in a contingency fund.
In fact, a credit card can be a reasonable substitute for short-term financing of a variety of emergency expenses such as home repairs, car repairs and travel for family emergencies. There are even services that allow you to use a credit card to pay your rent or mortgage, but most will impose a fee of 3 percent, so it’s best to use this option for emergencies only.
What to consider
When looking at how credit cards can fit into your financial plan, you need to consider several factors. For example, take a close look at what balances you have on each of your credit cards. Ideally, you should work to pay off your balances and avoid interest charges in the future.
Also, take a look at your credit line usage. Making large purchases that use up a significant part of your available credit can impact your credit score. If this is the case, it can make sense to get additional credit cards and request a larger line of credit from your existing cards. When you increase your available credit, you’ll lower your credit utilization ratio, for a given amount of debt. You should have sufficient credit so that your normal purchase volume uses up less than 30 percent of your available credit. Although it’s not a magic number, most credit experts agree that it’s best to keep your credit utilization below 30 percent.
How to prioritize your goals
Once you’ve laid out your financial planning goals, you’ll need to prioritize them in order to achieve the most important ones first. For example, before applying for a new credit card, ask yourself how it will help you to achieve your financial goals. For example, it could offer valuable rewards, a lower interest rate or lower fees.
You may also want to prioritize using a credit card instead of a debit card, in order to earn more rewards and to enjoy cardholder benefits such as purchase protection and travel insurance. Having two or more credit cards can also be an important strategy. A second card offers a backup in case one card is lost or stolen, and can supplement the rewards and benefits of your other card(s).
How a credit card can help with short term and long term financial planning
|Short term financial planning
|How a credit card can help
|Establishing a budget
|Credit cards offer reporting and expense tracking features.
|Meeting monthly payments
|Credit cards can help you to meet monthly payments by offering short term financing.
|Using rewards for everyday purchases
|Credit cards offer cash back rewards that can be used for common purchases.
|Long term financial planning
|How a credit card can help
|Some credit cards offer rewards in the form of a contribution to your retirement savings account.
|Credit card reporting and expense tracking can help you to prepare your taxes.
|You can use a credit card to pay unexpected medical bills, rather than keep cash on hand.
|Credit cards can be used for emergency expenses, rather than relying on cash.
The bottom line
Credit cards are powerful financial tools, and credit card users should consider them as part of both their short-term and long-term financial planning. While some consumers only associate cards with purchases and debt, they can be used to achieve a wide range of financial goals from preparing your taxes to funding your retirement account. By understanding all of the ways credit cards can be part of your financial planning, you can leverage these tools for your benefit.