Credit cards can be a very convenient way to buy stuff … and sometimes that’s not such a good thing.
According to the Federal Reserve, the average American family holds as much as $6,040 in credit card debt. Not only will that lead to thousands of dollars of interest due if not paid off timely, but it will also likely keep them from other financial pursuits such as buying a home or retirement. In some drastic situations, it can even lead to divorce, bankruptcy, and health problems.
Yet, for millions of other Americans, they seem to use credit cards and avoid trouble altogether. This isn’t because of luck or innate skill but through careful planning and strategic spending.
So how can you master your credit cards like millions of Americans do every month? Here’s how you can become one of them and not allow credit cards to ruin your life.
Pay On Time and In Full
If there’s one thing that everyone should learn before they’re ever handed their first credit card, it’s this:
- Always pay your credit card on time.
- Always pay your credit card in full.
Why You Should Always Pay Your Credit Card on Time
Your payment due date isn’t something that’s negotiable with the credit card companies. It’s a legal contract that you have to honor, or else there will be significant consequences.
For starters, late payments are hit with fees as well as interest. But more importantly, 35 percent of your credit score is based on your payment history. Unfortunately, all it takes is one or two missed payments to tank your score and sabotage your chances for future loans.
Fortunately, there’s a relatively easy way to avoid late payments: Automate them! Nearly every credit card provider in the world will allow you to set up automatic drafts from your checking account on or just before the payment is due.
By all means – you should do this! By having automatic payments, it will make it basically impossible to ever miss a payment.
Why You Should Always Pay Your Credit Card in Full
If you never want to pay the credit card companies a dime of interest, then there’s one smart thing you can do: Always pay off your entire balance in full every single month.
Every credit card has a grace period that follows the end of the billing cycle. As long as you make your payment on time and don’t allow any of the balance to carry over (by paying it off in full), then you’ll never accrue any interest.
Stay True to Your Budget
If you always want to be in a position to pay off your credit card in full every month, then the best policy you can follow is to never spend more money than you make.
As elementary as that might sound, you’d be surprised by how many people choose to ignore this fact. In a survey conducted by Mint, nearly 65% of the respondents said they had no idea how much money they’ve spent in the last month.
This is why it’s so often highly recommended by most financial gurus that you create some form of a budget for your finances. A budget doesn’t necessarily have to be anything fancy. It can be as simple as using an Excel spreadsheet, or you can go digital and use a smartphone app (like Mint or TYNAB) to keep track of your spending for you.
Either way, the goal should be to get familiar with your finances and understand what’s going in and what’s going out. The sooner you do that, the easier it will be for you to curb your spending and not put more on your credit cards that you can manage.
Be Aware of Your Spending Habits
Budgets are great for planning. But when it comes to our real-life day-to-day choices, there’s plenty that can go wrong.
- Buying a $5 latte.
- Going out for an expensive lunch with your friends.
- Making a spontaneous purchase online.
Although each of these purchases is completely innocent, over time they add up. And that’s when you’ll start noticing your credit card balance getting bigger than you can handle.
This is why half the battle of money management is to develop the right habits that will keep your finances in line. Here are some examples:
- Prioritizing your savings goals.
- Planning your purchases in advance.
- Checking with multiple vendors before making a purchase.
- Stashing away windfalls or bonus money.
- Avoiding spending out of boredom.
The more you practice these habits so that the right choice comes naturally, the more you’ll automate your way towards following your budget and avoiding credit card debt.
Don’t Over-Spend Just to Rack Up Rewards
I absolutely love credit card rewards. But I also know this is a trap set by the credit card companies to lure me into racking up the biggest balance possible every month.
One thing you must never do with a rewards credit card is to adopt a mindset that the more you spend, the more prizes you’ll get. This is a slippery slope that can quickly escalate into a situation where you’ve spent more than you can manage. And as a result, you’ll have no choice but to allow the balance you can’t cover to carry over into the following month – with interest of course!
Again, avoid this by sticking to your budget. Plan your purchases and be sure to always make earning credit card rewards a secondary priority.
If In Doubt, Use Other Forms of Payment Instead
For some people, the temptation and trouble they can get into when using a credit card is just too great. But as long as you recognize this early on, then that’s okay. You’ve got plenty of other options:
- Switch to buying things with cash only. Make a withdrawal from the bank every month for a certain amount of money and use it to fund all of your purchases. This will force you into staying disciplined to your budget since you’ll physically always be aware of how much money is left.
- Use your debit card. If you have to swipe your plastic, it’s okay to use your debit card instead. Since the transaction is an immediate withdrawal of money from your checking account, it will feel just like a cash transaction. Plus, by design, you’re not running any risk of accruing interest.
- Purchase prepaid cash cards. If you’d still like to enjoy the benefits of earning credit card rewards, then try buying a limited number of prepaid cash cards to serve as a middle-man. Just like the cash system, this will effectively force you to follow a budget because you can only use them until they run out.
Credit cards make it easy to buy the things we need and rack up a ton of rewards. But you have to be careful of how much you spend or you can very easily find yourself accruing more interest than you’ll know what to do with.
Keep your spending under control by following a budget and developing the right money habits. This will put you in the best position possible to make your payments on time, pay your balance off in full, and never pay a lick of interest more than you have to.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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