| How to Manage Your Credit Cards - and avoid debt |
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Credit cards, if used unwisely, can lead to a mountain of debt. If you charge more
than you can afford, make low monthly payments, or pay late, you may be headed
for trouble.
However, if you learn to use credit cards wisely, they can be convenient, help build
good credit, and prove useful in emergencies.
Don't Use Your Credit Card as a Loan
A credit card can be two things, depending on how you use it. If you carry a balance,
it is a very high interest loan. If you make only the minimum payment (usually 2-3% of
the balance) each month, you will be paying off the debt for years and years to
come, including a huge amount of interest.
On the other hand, if you pay off the balance each month, a credit card becomes a
convenient way to purchase items and services without carrying around a lot of cash.
Use your credit card as a cash substitute, not as a high-interest loan.
Charge Only What You Can Afford
Don't use a credit card to finance an unaffordable lifestyle. If you can't pay off the
entire balance every (or almost every) month, then you are overspending. Use these
guidelines to determine what you should and shouldn't charge:
You have cash in the bank to cover the purchase. If you have sufficient cash in the
bank to make a purchase, go ahead and charge it if you wish. Then pay off the
balance in full when you get the statement.
You don't have enough cash to cover the purchase, and the item is not for an
emergency. If you don't have enough cash to purchase the item or service, don't
charge it. Instead, save your money (preferably in an interest-earning savings
account) until you can afford the purchase.
You can't afford the item or service, but you need it right away. If you can't afford an
item or service, but need it now (for example, you must repair your car so you can
get to work), charge it. But, at the same time, make a plan to pay off the balance
over time -- figure out how much you can pay each month and how long it will take
you to pay the balance off. Then, stick to it.
Don't charge something if it won't exist when the bill comes. A good way to cut down
on credit card debt is not to charge anything (like a meal, groceries, or going to the
movies) that won't exist when the statement arrives. By paying cash for these kinds
of things, you save your credit for true necessities.
Create a Budget
If you cannot keep your credit card spending in check, create a budget. Make each
credit card purchase only within the framework of your budget. If you can't stick to
your budget, then don't carry your credit card with you (you may want to keep one in
the house for emergency use only).
Pay All (or Most) of the Balance Off Each Month
The single most important rule about wise credit card use is this: Pay off the entire
outstanding balance each month. If you must carry a balance from time to time, pay
off most of the balance each month. If you can only make the minimum payment each
month, you are in over your head. Stop using the credit card until you pay the entire
balance off.
Pay on Time
Penalties for late payments add up. And, many credit cards jack up your interest rate
if you pay late a few times. Late payments also damage your credit report.
Have Only One or Two Cards
You really only need one card, or two if some vendors don't accept your main card.
With one or two cards, you can keep track of purchases and make sure you pay
each on time. If you have to use one card to pay off the balance of another, you are
in trouble.
Don't Get Cash Advances
There are three reasons why you shouldn't use a credit card for cash advances. You
will:
pay higher interest pay transaction fees, and not get a grace period (which means
you pay interest from the day you get the money, even if you pay your balance in full
when the bill comes). Instead, go to the bank or use an ATM card.
Don't Sign Up for the Special Services
Credit card issuers bombard cardholders with ads for products such as credit card
fraud protection plans, travel clubs, and life insurance. These are almost always
overpriced or provide something you don't need. Shred the ads you receive without
reading them.
Keep Good Records
Keep all credit card receipts and reconcile them with your statement each month.
Review the statement as soon as you get it.
For more information on finances, debts, and how to regain financial health, read
Solve Your Money Troubles: How to Get Debt Collectors Off Your Back & Regain
Financial Freedom (Nolo).
than you can afford, make low monthly payments, or pay late, you may be headed
for trouble.
However, if you learn to use credit cards wisely, they can be convenient, help build
good credit, and prove useful in emergencies.
Don't Use Your Credit Card as a Loan
A credit card can be two things, depending on how you use it. If you carry a balance,
it is a very high interest loan. If you make only the minimum payment (usually 2-3% of
the balance) each month, you will be paying off the debt for years and years to
come, including a huge amount of interest.
On the other hand, if you pay off the balance each month, a credit card becomes a
convenient way to purchase items and services without carrying around a lot of cash.
Use your credit card as a cash substitute, not as a high-interest loan.
Charge Only What You Can Afford
Don't use a credit card to finance an unaffordable lifestyle. If you can't pay off the
entire balance every (or almost every) month, then you are overspending. Use these
guidelines to determine what you should and shouldn't charge:
You have cash in the bank to cover the purchase. If you have sufficient cash in the
bank to make a purchase, go ahead and charge it if you wish. Then pay off the
balance in full when you get the statement.
You don't have enough cash to cover the purchase, and the item is not for an
emergency. If you don't have enough cash to purchase the item or service, don't
charge it. Instead, save your money (preferably in an interest-earning savings
account) until you can afford the purchase.
You can't afford the item or service, but you need it right away. If you can't afford an
item or service, but need it now (for example, you must repair your car so you can
get to work), charge it. But, at the same time, make a plan to pay off the balance
over time -- figure out how much you can pay each month and how long it will take
you to pay the balance off. Then, stick to it.
Don't charge something if it won't exist when the bill comes. A good way to cut down
on credit card debt is not to charge anything (like a meal, groceries, or going to the
movies) that won't exist when the statement arrives. By paying cash for these kinds
of things, you save your credit for true necessities.
Create a Budget
If you cannot keep your credit card spending in check, create a budget. Make each
credit card purchase only within the framework of your budget. If you can't stick to
your budget, then don't carry your credit card with you (you may want to keep one in
the house for emergency use only).
Pay All (or Most) of the Balance Off Each Month
The single most important rule about wise credit card use is this: Pay off the entire
outstanding balance each month. If you must carry a balance from time to time, pay
off most of the balance each month. If you can only make the minimum payment each
month, you are in over your head. Stop using the credit card until you pay the entire
balance off.
Pay on Time
Penalties for late payments add up. And, many credit cards jack up your interest rate
if you pay late a few times. Late payments also damage your credit report.
Have Only One or Two Cards
You really only need one card, or two if some vendors don't accept your main card.
With one or two cards, you can keep track of purchases and make sure you pay
each on time. If you have to use one card to pay off the balance of another, you are
in trouble.
Don't Get Cash Advances
There are three reasons why you shouldn't use a credit card for cash advances. You
will:
pay higher interest pay transaction fees, and not get a grace period (which means
you pay interest from the day you get the money, even if you pay your balance in full
when the bill comes). Instead, go to the bank or use an ATM card.
Don't Sign Up for the Special Services
Credit card issuers bombard cardholders with ads for products such as credit card
fraud protection plans, travel clubs, and life insurance. These are almost always
overpriced or provide something you don't need. Shred the ads you receive without
reading them.
Keep Good Records
Keep all credit card receipts and reconcile them with your statement each month.
Review the statement as soon as you get it.
For more information on finances, debts, and how to regain financial health, read
Solve Your Money Troubles: How to Get Debt Collectors Off Your Back & Regain
Financial Freedom (Nolo).
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