A credit card can simplify every day. You can use a credit card to pay bills, make on-line or over-the-phone purchases, and pay unexpected car repairs. A quick swipe of the credit card saves you time when you pay-at-the-pump, rather than having to run in and pay first, while guessing how much gas you’ll need. There’s no need to go to the ATM for cash when you have a credit card; most merchants accept them, even for a tiny purchase like a fast food meal. Using a credit card means you never have to count out cash or wait for change; swipe, sign, and go. Even life’s little emergencies can be dealt with immediately with a credit card; a temporary lack of funds can be covered with a credit card. There’s no doubt that a credit card is a wonderfully convenient way to pay for almost anything.
A credit card can also become an out of control never-ending debt, if it’s not used carefully. A credit card is such a simple way to pay, and accepted so universally, that it can be easy to lose track of spending. One little thing here, another little thing there, can add up to a shocking credit card bill at the end of the month. An unwise credit card user may think of a credit limit as “extra money” and spend as long as they have available credit. This way of thinking leads to unmanageable debts, and can lead to serious financial trouble. It’s important to look at a credit card as what it really is; a credit card is essentially a pre-approved loan on a piece of plastic.
It’s important to use your credit cards wisely. Many people get in over their heads by over-spending, which is easy to do on credit. A credit card allows a person to live beyond their means for some time, before it all catches up with them. Before they realize it, all their credit cards are maxed out and they can’t afford to make more than the minimum payments. Don’t let this happen to you, stay in control of your debt. Staying ahead of your debt is important for your financial health and will help you to live within your means. It will also be good for your credit score, which will qualify you for better rates on mortgages, car loans, and future credit cards. Be smart in your credit card use, and take steps to enjoy the rewards of a credit card, without the avoidable burdens.
- Read and understand the terms and conditions of any credit card you’re considering. Any legitimate credit offer will state information such as annual fees, grace period, any fees for certain types of transactions, the way they compute your balance for interest charges, and the APRs for purchases, cash advances, and default. Be sure to find the fine print in the offer to learn this valuable information. I can guarantee that only the most enticing terms of the credit card will be on the front page in big, bold letters. It’s important to know this information before you apply. When you receive your new card, it will come with a pamphlet called the Cardholder Agreement. The pamphlet will give even more detailed information, and the conditions of additional features like rewards and services. That one will come in even tinier print, but it’s important to read and understand this information; it is a legal, binding contract. Using your card even once means that you agree to the card issuer’s conditions, and you are bound to that contract. If you see something in the contract you don’t like, don’t use the card and cancel the account.
- Pay your balance, in full, every month before the end of the grace period. Paying your balance off every month will prevent you from being assessed interest charges, which gives you free use of the credit card issuer’s money. It will also prevent you from living beyond your means, and keep you in the habit of only spending what you can afford to pay back. If it’s too late and you already carry a balance, make a sincere effort to pay it off as quickly as you can. We all have a bad month, sometimes we get caught by surprise on unavoidable expenses, or maybe had a slow month at work. A credit card can be a temporary fix for those situations. But it’s important that we don’t figure our credit limit into our budget as additional income; it is not income, it is a debt. Don’t make carrying a balance a habit, and be sure not to get caught in the minimum payment trap. The minimum payment was designed to keep you in debt for decades, even if you never charge another thing to your credit card. If you are carrying a balance, take a look at your current credit card statement. How can a $50 minimum payment make a dent in thousands of dollars of credit card debt when there is a $40 finance charge? It won’t, and it can take as long to pay off a credit card as a home mortgage if you only make the minimum payments.
- Know the card’s current APR at all times. A card’s interest rate may change without you realizing it; a late payment or mistakenly going over your credit limit can cause the default rate to take effect. If you carry a balance, this can mean a huge interest charge. Even without default, a credit card issuer can change the APR that you originally applied for. If you have a variable-rate card, the rate can change as often as spelled out in the Cardholder Agreement, commonly quarterly with many card issuers, but may be as often as monthly. If you have a fixed-rate card, the card issuer has to notify you, in writing, fifteen days before the rate change. If you use your card at all after the notification, you are automatically agreeing to the rate change. If you receive a rate change notification and no longer want the card due to that, contact the card issuer, immediately. They may allow you to pay off your current debt at the previous rate. But even if they agree to do that, don’t use your card again or you’ll commit yourself to the higher rate. If you never carry a balance, then the card’s APR really doesn’t matter, since you won’t be paying any interest, anyway.
- Pay on time and stay within your credit limit. You want to avoid the default rate at all costs, as one oversight on your part can stick you with those punishing rates, often as high as about 28% with many card issuers. On top of that hefty default rate, they’ll charge you late fees and over-limit fees. Those additional fees may be anywhere from $29 to $59 dollars a pop. Some card issuers also practice what is known as “universal default”, meaning that one late payment to one account can cause your other credit card issuers to raise your rate, too. Consumers may argue that this is an unfair practice, but there’s really nothing we can do about it except make sure we abide by the card issuer’s rules. So pay on time and stay within your credit limit, and you won’t have to worry about it.
- Use your credit card for the valuable budgeting tool that it is. Study your credit card statement every month, and know what you’re using credit for. While a credit card can provide a card user with an opportunity to overspend, it can also offer a responsible card user a nifty way to track all of their expenses. Gas, groceries, and everyday expenses will all come on an itemized statement each month. You might lose track of a few dollars spent here and there if you paid in cash, and it would take some time to track these expenses in a checkbook. But if you put them all on a credit card, you can easily see what you’re spending each month on those needs. Just make sure that you don’t spend more on these disposable necessities than you would if you were paying cash, so you can pay the balance off each month. If you can’t pay all your bills and your credit card balance, in full, each month, it’s time to draw up a new budget. You may find you have to do some cutting back to ensure you are living within your means.
- Avoid using your credit card for cash advances. When you received your card, you probably had the option to choose a PIN for ATM withdrawals. Most credit card issuers do not give a 0% introductory rate for cash advances, and the normal rate for cash advances is commonly around 20% APR with many card issuers. Often, a credit card issuer charges a transaction fee for cash advances, which is usually a percentage of the withdrawal, charged up-front when the card user takes the cash advance. To top it all off, they usually don’t give any interest-free grace period, and begin charging interest immediately. A credit card is typically a very expensive way to get cash; it should only be used if you have no better option. If you find you need cash on a regular basis, a personal line-of-credit at your bank or credit union is the way to go. Lines-of-credit are revolving accounts that work similar to a credit card account, and their rates are usually very competitive when compared to credit card cash advance rates.
- Be careful about over-playing the balance transfer game. A credit card balance transfer can buy a credit card user some interest-free time to pay down their debts. A balance transfer can also provide an irresponsible credit card user with a wallet full of credit cards with no balances, which may be just too tempting for someone who has a hard time controlling their spending. Someone without a debt repayment game plan may look at all their unused credit limits, thanks to a balance transfer to a new card, and feel like they have to go shopping! They could easily end up with twice the debt that they had hoped to pay off. It may be wiser to close other credit card accounts if you even suspect that it could happen to you. Closing other accounts may do a little damage to a credit score, but staying financially afloat is much more important. If you know you can control new spending, it’s probably a good idea to keep at least one or two other credit cards that give you the best terms.
- Don’t be shy about asking for a better deal. If you’ve had your account open for over a year or so, never went over your credit limit, and always paid your bill on time, your credit card issuer wants to keep your business. They value you if you’ve kept your account in good standing and have shown that you’re responsible with credit. You are being bombarded with better deals from other credit card issuers due to your responsible credit use? Let your current card issuers know that, they may be willing to reduce your APR or do away with an annual fee. They may agree to add a rewards program, or throw in platinum services, just for the asking. It won’t hurt to try, and it could save you money or add some benefits to your card.
Credit cards are a fast, easy way for us to pay for nearly anything. They save time, simplifying everything from fuel purchases to on-line shopping. Credit cards can also be the first bad habit that could lead to financial ruin. It’s important to remember that you are taking out a loan for every purchase you make with a credit card. Credit card debt has caused many Americans to resort to take equity from their homes to pay back the debt, or even file for bankruptcy. Don’t let credit card debt get the best of you; use your credit cards wisely.