Photo by Ales Nesetril on Unsplash
Many of us use credit cards regularly. From using them for everyday purchases to one-off larger ones, they can have many financial benefits. And as the cost of living increases around the world, so too has our credit card usage. In fact, credit cards now account for up to 31% of purchases made, increasing from 27% in 2020.
However, despite the frequent usage of credit cards, there are plenty of things that most users don’t know about them. In this article, we explore three little-known facts about credit cards that you probably didn’t know.
Credit cards can offer purchase protection
It’s common for credit cards to be used for expensive purchases, but the reasoning behind it is usually so that it can be repaid at a later date. However, there’s another major benefit to using your credit card for large purchases – purchase protection.
Most credit cards will come with built-in insurance policies that can protect your purchases against fraud, loss or theft if purchased on the card. For example, if you were to buy something from an illegitimate website and not receive your goods, your credit card provider can typically reclaim that money on your behalf.
Your credit utilization ratio is important
Credit utilization is a commonly overlooked aspect of credit management. It represents the amount of credit you have available to you compared with the amount that you’re currently using. This ratio can act as a representation of your financial stability to future lenders, with a high credit utilization indicating that you could be overextending financially.
The ideal credit utilization ratio is typically below 30%. To keep your ratio at or below this figure, it’s a good idea to keep on top of your credit card payments each month and restrict yourself from further spending if you get close to it.
A credit limit increase may not always be a good thing
Although a letter from your credit card provider offering you a credit limit increase might seem like a good thing, it can also have negative effects on your finances. It’s important to remember that although you’ve been offered an increase, it doesn’t mean that you can necessarily afford to be spending more.
If you’re not able to pay off your credit card balance in full at the end of each month, a higher credit limit can make it easier for you to accumulate debt. Not only will the interest charged each month grow with the balance, but having a card with a high credit limit can also encourage us to make larger purchases that we may not realistically be able to afford.
Credit cards can be a useful tool when used correctly, but it’s important to have a solid understanding of all the necessary information before you jump into putting all of your payments on your card. By being aware of the three things we mentioned in this article, you can ensure that you’re using your credit card as responsibly as possible, setting yourself up for long-term financial stability.
