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 (even if they’ve caused you trouble in the past), it may not be the smartest financial plan. Unless you know how to use credit cards wisely, they could quickly lead you into debt. However, used wisely, credit cards may help you manage your cash flow, establish a credit history, and earn program 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. The following is a primer on how to use credit cards wisely, beginning with some general rules for good financial health.
Financial health 101
Regardless of how you use credit cards, there are two very important financial rules you should follow to stay out of debt.
- Always spend within your means. This simple rule isn’t always 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.
- Build a savings account. This rule can help the first one, because if you’re hit with an unexpected expense, you 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).
Reflect on your past credit card habits
If you’ve used credit cards in the past, perhaps to a fault, you’ll want to reflect on your past habits before you use them again. 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?
Tips for how to use credit cards wisely
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:
Pay your balance in full and on time every month
If you only pay the minimum amount each month, it will take you a long time to pay down your balance. Paying your balance in full (and on time) every month 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.
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.
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.
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.
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.
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 okay 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 plunge you into a stressful cycle. That’s why it’s so important to learn how to use credit cards wisely. 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 explore other options.
Get your finances under control
Learning how to use credit cards wisely and deal with debt, money, and planning for your future doesn’t need to be difficult. Our simple-to-follow guide will help you find the tools you need to develop healthy financial habits. Get started by downloading our free guide right now.
- Unemployed? Here’s How to Keep Managing Your Credit Card Debt (Freedom Debt Relief)
- Convenient Alternatives to Credit Cards (Freedom Debt Relief)
- How to Use a Secured Credit Card to Build Credit (Freedom Debt Relief)