No matter how you feel about credit cards, the reality is they are a part of life. Not only is it unrealistic to think you’ll never use them again, it may not be the smartest financial plan. Unless you know how to use them wisely, credit cards could lead you back into debt. But credit cards may help you manage your cash flow and possibly earn valuable rewards.
It’s a good idea to think about what role credit cards should play in your future and how you can use them safely. Here are some points to consider:
Financial Health 101
Regardless of how you use credit cards, there are two very important financial rules to follow to stay out of debt.
1. Always Spend Within Your Means
This rule is simple, yet sometimes not so easy to follow. Whenever you have a shortfall, it’s tempting to turn to credit cards to see you though. But the more you focus on spending less than you earn, the more you help ensure there won’t be a shortfall.
2. Build a Savings Account
This rule can help the first one, because if you’re hit with an unexpected expense, you’ll have the funds to cover it and won’t need to put it on your credit card. (It’s amazing how quickly you can build a nice cushion from even small amounts put away regularly).
Time to Delve Deep
It’s also important to do some honest reflection about how you’ve used credit cards in the past so you can make a plan for using them better in the future. Ask yourself:
- When you first got into debt, was it because you spent too much in general, or was it because something happened that was out of your control that caused you to rely on your credit cards?
- Do you have a hard time resisting spending when you have credit cards available?
- If you decide to use a credit card again, can you be sure you’ll have the self-control to avoid overspending?
- Looking back, how should you have used your credit cards differently?
- What do you like and dislike about having credit cards?
Careful Credit Card Use
Just because you’ve struggled with debt in the past doesn’t mean you need to avoid credit cards altogether. When you’re ready to use credit cards again, consider the steps outlined below to help maintain control of your hard-earned financial balance:
1. Pay Your Balance in Full and on Time Every Month
This has several benefits:
- You avoid paying interest and avoid adding to your debt.
- It will be reported to the credit bureaus as being paid on time, which should help improve your credit profile.
- It will keep your utilization rate or balance-to-limit ratio low.
2. Keep Your Credit Limit Low
That way, if things do get out of hand, you won’t be in a deep hole. If there’s ever a month where you can’t pay the entire balance, pay as much over the minimum payment as you can and try to make up the difference the following month.
3. Consider a Secured Credit Card
With this type of card, you deposit money into a savings account, which is used to set the credit limit and as collateral against the card. If you can’t pay off the card, the creditor may use the money in the savings account to do so. Secured credit cards also report to the credit agencies, which can help your credit profile if you make payments on time.
4. Don’t Use the Card as a Savings Substitute
You want to have a savings account too. As your money grows, you’ll earn interest on it, instead of potentially paying interest on the card if you’re unable to pay the balance in full each month. Plus, there’s just a great feeling of safety that comes from knowing you have a financial cushion to pay off an unexpected expense instead of having to put it on a card.
5. Watch for Better Card Deals
While you may want to stick to using just one card in the interest of keeping your credit life simple, it’s smart to switch if you get offered a card with a lower interest rate and fees. Be careful not to apply for too many cards, though. Every time you apply for a card, it shows on your credit report.
If you get another card, don’t close your previous card. Having an available line of credit on a card with no balance will help improve your credit score, as will having accounts that have been open longer. Just make sure you put the card away and keep the zero balance.
6. Avoid Using Cash Advances or Credit Card Checks
Unlike debit cards, you can’t withdraw cash from your credit card for free. Even if you pay in full each month, you’ll be charged fees and a higher interest rate than on purchases.
It’s OK to Play It Safe
Credit cards are a tool that can either help you develop a healthy credit history and manage your cash flow or damage your credit and put you back in a stressful cycle—it all depends on how wisely you use them. The tips above will hopefully help you take advantage of credit cards without getting back into debt.
The important thing is to do what feels right for you. So if you’re not sure you are ready to start using traditional credit cards again, you can find other options by exploring these 3 Alternatives to Credit Cards.