Credit cards are convenient and can play a positive role in your financial plan. But their ease-of-use can lead you astray, and if you’re not careful, you can end up in caught in a cycle of ever-growing credit card debt. Here’s how to use credit cards to your advantage while avoiding their pitfalls.
Use Only When Needed
To follow this tip, you’ll have to first identify what qualifies as a “need” and what qualifies as a “want.” Credit cards let you to buy things you don’t currently have the cash to pay for. But because you pay interest on every purchase (unless you pay off your balance in full each month), you end up paying more than the actual purchase price. Consider using credit cards for big, one-time purchases and only, purchases you’ve really thought out. It’s never a good idea to put impulse buys on a credit card.
Pay It All Off
Paying only the minimum on your credit card bill each month is the quickest way into deep debt. If you can, pay off the entire balance to keep from incurring any interest and to remain debt free. If you can’t pay it all, pay as much as you can so you can get rid of the debt fast.
Credit card companies charge interest on your balance (the amount you spend using the card). The percentage of this interest varies, so if you won’t be paying off your balance each month, go for the card with the lowest interest rate.
Have an Emergency Fund
When unexpected expenses pop up, it can be tempting to turn to a credit card, but if you’ve set up an emergency fund, you can use the cash you’ve saved there to cover necessary purchases and bills without creating any debt. Open a dedicated account, put a small portion of every paycheck into it, and don’t take money out except in the case of a true emergency. There’s no such thing as a shoe emergency!
Make a Plan
If you’re working toward a long-range goal like buying a house, taking a great vacation or retiring early, you’ll be more motivated to live within your means and use credit cards sparingly so you don’t incur any (or any more) unnecessary debt.