How to Use Credit Cards and Have “Good” Debt
Credit cards are one of the most common payment methods available in our society. They are convenient, many of the cards allow you to earn points or rewards towards airfare, hotels, and car rentals, and if you use them correctly you could even improve your credit score. Because having a credit card debt that you can manage to pay back is a good debt. However, because credit cards are so easy to use, they can also lead to big debt problems if you give up control over to them by allowing your spending to go unchecked.
The problem with out-of-control spending is not just the cards themselves – many credit cards charge high interest rates (19.99% or higher), and they will be tough to pay down if you carry an unpaid balance. Here are some tips for how you can use credit cards without ending up in a debt hole.
Create & Stick to a Budget
Everyone needs to have a budget, no matter how much you earn. If you do not have a monthly budget, this is the time to create one. The goal is to spend less money than you earn each month. If you have a budget, and you stick to it, you will always be able to pay your credit card bill since you will not be spending more than you can afford to repay each month. Ensure you include an expense category in your budget for your credit card repayment amount each month. Those funds must come out of the after-tax income you earn. Often, we forget to budget this expenditure into our budgets.
It is wise to review your budget periodically and update it accordingly relative to your circumstances and your financial goals.
Track Your Spending
You need to track your spending if you want to make sure you spend according to your budget. Whenever you make a purchase, write it down somewhere. You can use an app on your phone, you can create a spreadsheet on your computer, or you can use pen and paper to track your spending. It is important to record your purchases right after you make them. This way, you will not end up forgetting to track them and you will not be spending more than you budgeted for.
If you find that you have gone over your spending limit in a certain category, you will want to reduce some of your other expenses for that month, so you do not end up spending more than your monthly net income.
Save Up for Big Purchases
Plan and save towards that large purchase. If there is something you want and it does not fit into your regular monthly budget, you will need to reduce other expense(s) over a set period so you can put aside some extra money for your big purchase.
Treat your credit cards the same way you would treat spending cash. If you do not have money in your bank account for something you would like to buy right now, do not buy it until you have saved up the funds for it.
Limit Your Credit Cards
The less credit cards you have, the more likely you are to succeed in tracking your expenses and not end up overspending. Many of us have a few different credit cards, but it is important to try to stick to a small number. If you have many different cards, consider cancelling some of them over time, and then only carry a remaining few with you when you go out.
Always Pay More Than the Minimum
Paying your entire balance every month is ideal. If this is not possible, plan your budget so that you can pay as much as you can each month towards the outstanding balance. The quicker you pay off your cards, the less you will incur in interest charges monthly.
If you only make the minimum payment on your credit cards, you will end up paying a large amount in interest and it will take you a long time to pay your balance off in full. Therefore, you should always try to pay more than the minimum.
Have a Plan to Pay for Purchases
You should have a plan for how you are going to pay off your credit card bill. Before you spend the money for a larger purchase, spend some time answering a question: “how can I pay the credit card bill?” If you cannot see clearly how you will be able to afford to pay your credit card down, do not make any further purchases until you have a plan.
This strategy can also help you avoid making “impulse purchases.”
Know How Much You Owe
It is understandable to be anxious when examining your credit card statements. Even if you cannot pay your credit card balance off in full, it is still important that you determine how much you owe. Look at your bills each month and, if you see them getting out of control, commit to putting the cards away and living off cash for a while until you can get your debt load down to an amount you can handle.
If you have determined your debt load is too high, or no longer manageable with some assistance, please reach out to our licensed professionals today by clicking on the FREE CONSULTATION button, below, or giving us a call. We are here to listen – and to help you!