5 Tips To Better Manage Your Credit Card
Because many people are buried in credit card debt, credit cards often get a bad rep. However, they can be beneficial when used responsibly. While not my first recommended course of action, a credit card can be useful for an emergency when in a bind, and they can help establish and build credit. I got my first credit card while in college and only used it for things like food and fuel. I only allowed myself to spend around $100/month and I always paid it off every month. I was lucky enough to not have to use credit for any big emergencies or expenditures, and I was committed to using my credit card wisely. The result: I graduated from college with a credit score in the mid 700s.
(Note: If you’re currently carrying a balance on your credit card, stop here and create a plan to pay down that debt first. This is the most important thing that you can do first and foremost when beginning to manage your credit card debt and usage.)
Now onto the tips…
Save money to use in emergencies rather than relying on credit. Yes, a credit card can be a good resource in a pinch but don’t always rely on credit. Taking on debt to cover unexpected expenses is extremely normal, but if possible try to build up some savings to prevent this. Set aside money each pay period to build up a stash to use for emergencies and unplanned expenses. Even if an emergency comes up and you can’t fully fund it with savings, you’ll at least be able to offset some of the costs. The goal is to have enough saved so that you’ll no longer have to reach for your credit card when in a bind.
Don’t max it out. It’s tempting to overspend even if you know that your credit limit is more than you can comfortably afford. It’s easy to swipe a card and then think that you don’t have to worry about paying it off for a while. However, the consequences are huge. High interest rates make your purchases much more expensive, using your entire credit limit increases your credit utilization which negatively affects your credit score, and paying off a maxed out card can be very difficult depending on your credit limit and income. If you have a high credit limit that’s beyond what you can afford, it will be difficult to come up with the cash to pay off your balance. The bank who issued your card will nail you with expensive interest charges until the balance is paid which makes it even more difficult to dig yourself out of the debt.
Don’t carry a balance at all. The best advice that I ever received regarding credit cards was to treat it like a debit card. Only use it for purchases that you could afford to pay for with cash. Try to pay your bill in full every month so that you won’t carry a balance forward and have to pay interest on your purchases. If this isn’t possible due to budget constraints, at least pay more than the minimum and then create a plan to pay off your balance.
Think of your credit card as a means to build credit if used responsibly. Changing the way that you think about credit will change the way that you act with credit. Hopefully this will deter you and make you think twice about frivolous use. If you’re new to credit card usage, think about this before swiping your card for a purchase. If you’re already struggling with credit card debt, keep this in mind as you work through your budget and create a plan to tackle your debt. Changing your mindset and therefore adopting better habits and behaviors is half of the battle.
Think twice before closing an unused card. If you have a card with a $0 balance and you’re considering closing out the account, weigh the pros and cons beforehand. Keeping the card open will be beneficial if it helps keep your credit utilization low. You can keep the account and get rid of the actual card if need be. Cut the card into pieces or store it somewhere out of sight where you won’t be reaching for it. It can also be beneficial to keep the account if it’s one of your older accounts and plays a part in your credit history and average age of accounts. Both of these are factors in determining your credit score. However, if the card comes along with annual fees and such, consider if these benefits are worth the fee. In many cases, the temporary drop in credit score is better than paying the annual fee. But every situation is different. Weigh your options, then make your decision from there.