Have you ever wondered how some people use credit cards wisely to avoid credit card debt? How do they use credit cards without getting buried in debt?
Once people start using a credit card, imagining life without it is hard. Credit cards offer convenience, reward points for trips or purchases, and can save you money on bank service charges because you’re withdrawing cash less frequently. But that handy card can become a troublemaker if you’re not cautious. When your bank account is low, relying on credit for essentials or luxuries can lead to significant problems.
Ten Tips to Use Credit Cards Wisely to Avoid Debt:
1. Stick to One Credit Card
Stick to just one credit card. Having more than one is optional for most people. However, a second card might be helpful if you aim to gather reward points from a specific store or need a backup card for travel emergencies.
However, if you struggle with credit card debt, having multiple cards can make the problem worse. It’s better to stick to one card as a personal rule, with no exceptions. This also makes it easier to turn down new credit card offers you might encounter in stores, through mail, or online.
2. Don’t Use Credit Cards to Pay for Credit
Avoid using one line of credit to pay off another, primarily if the interest rates differ significantly. Some people use a line of credit with lower interest rates to cover their credit card payments each month. Alternatively, they might apply for a low promotional interest rate credit card and transfer balances from higher-interest cards. While this strategy may initially reduce interest payments, it can lead to accumulating more debt due to increased available credit.
If you opt for a balance transfer to lower interest payments, consider closing the original credit card account and focus on paying off the transferred balance before the promotional period expires. However, be cautious—the fees might be higher than expected. If you cannot pay off your account within a few months or rely on credit to cover regular expenses, seek assistance.
3. Plan Ahead: Save for Your Purchases
Many individuals need help with credit cards because they exceed their spending limits. Protect yourself from this scenario by saving money beforehand. Before purchasing with your credit card, ensure you have enough cash to cover the cost. This method enables you to reap the benefits of utilising a credit card while mitigating the risk of being unable to make full payments.
The key is to allocate specific funds for each credit card purchase and ensure that they are not diverted for other expenses. One effective method is establishing a dedicated savings account, naming it your “credit card payment” account. This practice helps you manage your finances more efficiently and resist impulsive spending. Subsequently, when your credit card bill arrives, you can effortlessly settle it using the funds from this designated account, as you’ve already saved up for it.
4. Keep Your Credit Limit in Check
Consider requesting a low credit limit, or if your current limit exceeds your comfort level, contact the credit card company to decrease it. Since they must obtain your consent before raising the limit, they may attempt to dissuade you from lowering it. Stay firm in your decision and adjust your limit to a reasonable amount.
High credit limits or multiple cards are unnecessary for establishing a positive credit history. Additionally, a lower limit can mitigate the impact of fraudulent activity, as it limits the potential damage caused by thieves. Moreover, you can typically make a temporary credit increase for occasional larger purchases like plane tickets or hotel stays by contacting the card issuer. If uncertain, it’s advisable to reach out to them for clarification.
5. Build Credit Responsibly Without Accruing Debt
Utilising a credit card responsibly offers an effective means of establishing creditworthiness. If you’re concerned about overspending, refrain from using the card for general shopping. Instead, set up a single pre-authorized charge for a fixed amount each month, such as a Netflix membership, and then securely store the card away.
This approach allows you to develop a positive credit history through account usage while ensuring that the expenditure aligns with your budget as it has been pre-planned. Keeping the card out of immediate reach creates a barrier that reduces the temptation to overspend.
6. Evaluate the True Value of Credit Card Rewards
While credit card reward programs may appear enticing, they can also encourage unnecessary spending. The key is to use rewards and loyalty programs without allowing them to dictate your purchasing decisions. Remember, never make a purchase solely for earning points.
Stay informed about the terms and conditions outlined in your cardholder agreements and the workings of the reward programs. While accumulating points may seem straightforward, it’s essential to consider whether purchasing the reward item directly would have been more cost-effective, particularly if you end up accruing interest on your purchases. Additionally, you risk losing your accumulated rewards if your account becomes delinquent.
7. Always Pay Your Credit Card Bill on Time
Ensuring you pay your credit card bill promptly each month is crucial to avoid late fees, penalties, interests, and negative impacts on your credit score. Late payments can incur additional charges and may lower your credit score, making it harder to secure credit in the future.
Set up reminders or automatic payments to ensure you get all the payment deadlines. By consistently paying your bill punctually, you demonstrate responsible financial behaviour and maintain a positive credit history.
8. Maintain a Low Utilisation Ratio
Strive to settle your credit card balance in full every month. However, keeping your utilisation ratio low is essential if that’s not feasible. Your utilisation ratio is the percentage of your available credit that you’re currently using. For instance, if you have a credit limit of ₹500,000 and your outstanding balance is ₹2,50,000, your utilisation ratio is 50 per cent.
Utilising a large portion of your available credit can make it challenging to repay debts and may gradually lower your credit score. Additionally, higher utilisation ratios can lead to increased interest payments over time. As a rule of thumb, maintain a utilisation ratio below 30% of your available credit card limit to optimise your credit health.
9. Avoid Opening Too Many Accounts Too Quickly
While numerous credit cards offer attractive terms and features, opening multiple lines of credit quickly can lead to increased debt accumulation. Managing multiple credit cards simultaneously can also make monitoring your spending and payment dates challenging. Moreover, opening various accounts rapidly may adversely affect your credit score, and you might encounter difficulties if you apply for several cards within a short period.
A credit card can contribute to financial security and establish a strong credit history when used responsibly. This advice will help prevent overwhelming credit card debt, fostering a greater sense of financial stability.
10. Familiarise Yourself with Your Credit Card Terms
Grasping the specifics of your credit card agreement is essential to preventing unexpected fees and staying on top of your payments. Each credit card comes with its terms, including varying interest rates and potential fees. Before using your card, carefully review the agreement to understand the circumstances under which fees will be charged, how interest will be calculated on your account, and when the interest rate may increase.
Selecting a credit card that matches your spending habits and financial objectives. Knowing your credit card terms lets you make informed decisions and effectively manage your finances.
Final Words:
Using credit cards wisely is crucial to avoid falling into debt traps and uphold financial stability. By adhering to these ten tips, you can leverage credit cards to your advantage while mitigating potential risks:
- Stick to one credit card to simplify management and minimise the risk of overspending.
- Avoid using credit cards to pay off other credit obligations to prevent further debt accumulation.
- Save up for purchases beforehand to ensure they fit within your budget.
- Keep your credit limit reasonable to avoid excessive debt and potential fraudulent activity.
- Use credit responsibly to establish a positive credit history without accruing unnecessary debt.
- Evaluate credit card rewards carefully to ensure they align with your financial goals.
- Always pay your credit card bill on time to avoid late fees and adverse effects on your credit score.
- Maintain a low utilisation ratio to optimise your credit health.
- Avoid opening multiple accounts too quickly to prevent debt accumulation and potential credit score damage.
- Familiarise yourself with your credit card terms to understand potential fees and interest rates.
By adhering to these guidelines, you can efficiently manage your credit cards and avoid falling into the debt trap, leading to greater financial security and peace of mind.