While beneficial in many ways, credit cards are potentially dangerous even for long-time users. The main danger is too much credit card debt, which attracts various risks – thousands of dollars in interest payments, potential damage to your credit score, and delayed financial goals.
According to the Federal Reserve, Americans were carrying a massive $4.4 trillion in credit card debt in December 2021. That breaks down to more than $6000 in credit card debt per household. The good news is that you can avoid the pitfalls through responsible credit card use.
Keep reading for our credit card tips for smart users.
Build a Safety Net
Depending on your credit card for emergencies isn’t a smart financial move. For starters, it’s the equivalent of getting a loan. You’ll have to pay interest, which is an added expense that may not fit into your current spending.
Moreover, it doesn’t motivate you to look for other solutions like shopping around for better prices, negotiating a discounted price, or even trying a DIY solution. Using a credit card for emergencies puts you at the risk of going into debt, especially if a second or a third emergency occurs.
But what if you had a safety net before the emergency occurred? You wouldn’t have to rely on credit card debt to pay for emergencies. In addition, the money you currently spend on credit card payments could go towards your emergency fund.
Building an emergency fund is not easy. But whether you put $25 or $1000, it adds up with time. Start where you can, and work towards your short-term goal for it. Don’t stop adding money into it, at least not before the fund hits six months of living expenses.
Pay the Full Balance Every Month
It’s entirely possible to get by if you make the minimum payment each month. However, this is a dangerous practice that gives you a false sense of security. For starters, minimum payments mean that you’ll spend more time paying off your debt, whose interest increases with each passing month.
There are also other fees to consider – annual fees, late payment fees, and cash advance fees. While annual fees are mandatory for some credit cards, the rest are for things you shouldn’t be doing in the first place. They add up and increase the cost of credit card debt with time.
Paying the full balance each month is best to avoid credit card debt. If you can’t afford the full payment, consider paying more than the minimum amount. It will reduce the overall interest and help eliminate the balance sooner. Another great tip would to be to find out how Freedom Debt Relief lowers credit card bills.
Avoid Cash Advances on Your Credit Card
It’s tempting to get cash from your credit card, especially when you’re low on funds. However, withdrawing cash using your credit card is quite different from getting a credit card advance. The latter is an expensive loan that can easily plunge you into debt.
A cash advance is priced differently than other credit programs. It comes with a cash advance fee that’s either a percentage of the advance amount or a flat rate. The fee usually ranges from 2% to 5%, with most creditors charging on the higher end. Other factors that make credit card cash advances expensive include ATM fees, higher interest rates, zero grace period, and stringent payment allocation rules.
Taking a cash advance on your credit card also increases the risk of falling behind on your payments. To be on the safe side, avoid cash advances and consider alternatives like getting creative with gift cards if you are in a pinch.
Recognize the Early Warning Signs of Credit Card Debt
Knowing the early signs of credit card debt allows you to reassess your spending and adopt practices that benefit you long-term. If the minimum monthly payments exceed 10% of your income after taxes, your credit card ratio is too high, and it’s time to pull back spending.
Other signs to watch out for include:
- You use one credit card to pay another
- You’re considering seeking a credit card debt relief program
- Your monthly expenditure exceeds your monthly income
- Your money goes towards paying credit card debt rather than building an emergency fund
- You’re missing or making late payments because you can’t afford other bills otherwise
Limit Your Number of Credit Cards
Having too many credits can cost you money and make your financial life difficult in more ways than one. For starters, your monthly bill payments become more complicated each time you get a new credit card. And while you can set up autopay to avoid late payments, you still have to stay on top of your bank balance.
More credit cards equal more annual fees, even for the cards you barely use. It’s also easy to fall into bad spending habits when you have thousands of dollars in available credit. An even bigger frustration is that your credit score doesn’t improve and getting approved for new credit. Last but not least, it takes longer to catch credit fraud, which is a whole other beast. There is no right or wrong answer regarding how many credit cards you should have.
Before getting a new credit card, consider the following:
- Will you use the card often enough to justify having it?
- Can you afford the several payments?
- Can you use the cards responsibly, or is simplicity the best option?
Stick to What You Can Afford
Credit cards can be too convenient and tempt you into spending more than you should or would. It’s easy to rationalize impulse credit card purchases that you’ll pay soon when the fact is that you shouldn’t spend money you don’t have. And just because credit cards make it possible to make a purchase, that doesn’t always mean you can afford it.
There is also a physiological tendency among credit card holders to compare purchases to their available credit rather than the bank balance. It’s easy to forget that a $1000 available credit card balance is an illusion.
A better habit is to stick to buying what you can afford. Try saving for things you want instead of putting them on your credit card. Only use your credit card if you can afford to pay back the amount right away. Living on a cash basis can also make you less prone to overspending.
Understand Your Credit Card Terms
While the Credit Card Accountability Responsibility and Disclosure of 2009 made it easier to understand credit card terms, there is still a lot of confusion with these offers. Some credit cards attract different rates, and knowing which ones apply to you can be confusing.
The terms that govern redeeming credit card rewards are also a doozy – you may never get bonuses unless you seek them, and creditors are always changing the category of purchases that generate rewards.
Other details that are usually buried in the fine print include how interest will be applied, what will cause an increase in interest, the number of fees that will be charged and when, and more. Understanding these details can help you understand what you’re getting into and avoid credit card debt.
Credit cards can be beneficial or cause financial downfall, depending on how you use them. Thankfully, you can ensure your credit card works for you and improve your financial wellness by following these tips for managing credit cards.
The author Allan Smith is a professional finance writer specializing in personal finance. He has worked in the finance sector for a long time. He believes that everyone’s economic and life situation is isolated, and he keeps this fact in mind while providing personal finance advice in his blog Day to Day Finance. All the people seeking financial guidance are in different stages of life. Allan loves to explore every possible angle of personal finance so that anybody can get help.