Credit cards provide a convenient way to make purchases, and they are a useful tool in building and maintaining good credit. When you are consistent and responsible with your credit cards, they can help you obtain more credit down the line. However, credit cards must be used carefully to avoid the pitfalls of credit card debt. Learn about the top tips for using your credit card responsibly and avoiding crushing debt.
Use Cash or Debit Whenever Possible
When you have a credit card, it may be tempting to charge everyday purchases on it and pay off the balance before interest can accrue. If you are extremely responsible and always pay off any charges on your credit card immediately, this strategy can work. However, most people fail to pay their bills in full each month, and the result is credit card debt for everyday expenses like food and gas. To avoid paying interest on necessities, use cash, your debit card, or a prepaid card whenever possible. Using these payment methods can help your credit score. If you can keep your credit card balance under 10 percent of the credit limit (a metric also called “credit utilization ratio”), your score will improve. In addition, studies show that people tend to spend less overall when they use cash instead of credit.
Stick to a Budget
Along with using cash or debit instead of credit whenever possible, sticking to a budget is also part of responsible credit card use. Create a monthly budget with categories for all your major expenses, as well as savings and semi-regular expenses such as vehicle maintenance or appliance replacements. A lot of people are tempted to use credit cards to treat themselves or loved ones to lavish gifts that they ordinarily cannot afford. This will inevitably result in a high credit card balance that you’ll be paying interest on long after the feeling of instant gratification wears off. Learn to distinguish between needs and wants and make a special category for discretionary spending. This will help you avoid feeling deprived while also keeping your savings on track.
Build an Emergency Fund
Many people put expenses on a credit card under the justification that the spending was a true emergency. In reality, few of the things people put on credit are true emergencies. For example, many people use their credit card to purchase new tires for their car, when this is actually a foreseeable expense they could have saved for. Sticking to a budget and concentrating on building an emergency fund are the best ways to avoid putting large purchases on a credit card. Ideally, an emergency fund should contain three to six months of living expenses. Don’t worry if you cannot immediately establish an emergency fund with this amount—save a little bit each month. When you need to dip into your emergency fund, create a plan to replace the money so you are not tempted to use credit instead.
Make Timely Payments
This may go without saying, but paying your credit card bill on time will preserve your credit rating and help you avoid the problems that come with late payments. When you pay on time, you build a positive credit history that can help you secure more credit in the future. Even if you do not plan to apply for a new credit card, your good credit standing can help you qualify for major purchases like a home or car and will be a deciding factor in the interest rate you qualify for.
To avoid high minimum payments on your credit cards, avoid putting unnecessary purchases on your card and always include credit card payments in your budget. If you have problems making your minimum monthly payments, consider meeting with a credit counselor, accountant, or other financial professional to discuss your options.
At the same time, try to pay more than just the minimum payment on your credit cards. Of course, paying the minimum is better than paying late or not all, but if your goal is to get out of debt, avoid paying the bare minimum. Minimum payments chip away at your balance very slowly—and any balance on the card continues to accrue interest. Only making the minimum payment makes it nearly impossible to pay off the balance. Remember: always try to pay off your balance in full as quickly as you can.
The Benefits of Using Your Credit Card Responsibly
Responsible credit card use is essential to maintain a favorable credit profile that makes you more attractive to lenders. Keeping your utilization low shows lenders that even though you have access to a credit line, you aren’t in a hurry to max it out with frivolous purchases. By minimizing overuse of credit, you’ll be able to access these funds when you truly need them, and you’ll be more likely to qualify for larger loans, like a mortgage or a new business loan.