Oh, the irresistible lure of the credit card. If you think that money doesn’t buy happiness – but credit cards do – well, that’s a sentiment we can all relate to. According to creditcards.com, approximately 50.2 million American households have credit card debt, and the average amount of that debt is $15,956.
Saving yourself from credit card debt is not as simple as putting scissors to plastic. If used properly, credit cards can become a powerful tool for restoring and improving your credit score and your financial well-being. Here are some tips for using credit cards wisely.
It may not feel like you are spending money when you hand your credit card to a sales clerk, but you are. If you don’t have the money for your object of desire, it should not be purchased with a credit card. Start treating your credit card like cash or a debit card; subtract the purchase price from your bank balance. If you can pay your credit card bill online, keep the receipts from your credit card purchases, and pay the total amount when you get home.
If this method seems too risky for your spendthrift style, try keeping a record of your bank balance in your purse or wallet (on a piece of paper or in a notebook), and then subtract your purchase from that balance every time you step up to a register. This will help you keep an eye on your cash flow and keep you from spending more than you can pay off.
Spending wisely also means separating needs from wants. This can be difficult to determine while you are shopping. It is all too easy to get caught up in the thrill of a purchase. If you can’t decide if you need it or want it, walk away. Often, after 24-hours, it will become clear whether or not the item is worth the sticker price.
However, there are genuine needs like medical supplies or home and auto repairs. Many people will use their credit cards for these expenses, because they simply don’t have the cash. However, this practice can lead to unintentional debt problems. You can avoid this situation by including an emergency fund in your budget. Putting away some cash every paycheck can quickly build a safety net that you can rely on when the unexpected happens.
Cash advances are something else that you want to avoid, and it can often be an indication that you are spending more than you can afford. Limiting the number of credit cards you carry will limit your temptation and limit the amount of debt you can rack up. Also, even if you can afford to, you shouldn’t max out your card. A portion of your credit score is determined by the amount of credit you use. The more available credit you use, the bigger the hit on your credit score. Spending to your credit card limit could also trigger a default rate on your credit card, increasing your interest rate.
If you can learn to use a credit card responsibly, you will be able to take full advantage of what plastic can offer you. Using your credit card properly can also lead to a better credit score, lower debt and better interest rates when you do finance.