Credit cards can be both a blessing and a curse. The convenience they come with allows us to pay bills, buy items online with relative safety, and – in many cases – give us rewards for simply buying items we would buy anyways. This convenience though comes with a nasty bite which can catch many unsuspecting and undisciplined individuals off guard. This bite can leave an individual in a pit of debt that many cannot handle. This bite can be so devastating that financial experts, such as Dave Ramsey, will steer individuals away from credit cards entirely. Honestly, it is a good suggestion.
Credit card debt hit over a trillion dollars at the beginning of 2018. The average American is now carrying about $6,375 of credit card debt alone. It is a major problem. The worst part is many of those same Americans pay merely the minimum payment – keeping them in debt for years with high-interest rates. It is easy to see why some financial experts would steer people away from credit cards.
Credit cards are quite the beast. However, there are ways to smartly use credit cards to allow you to access the benefits of a credit card, without getting bit with devastating debt. Here are three quick rules of using a credit card.
1. Never use a credit card to buy something you could not already afford
One of the first ways an individual gets caught by the credit card beast is by thinking that credit cards are giving them free money. Nothing is further than the truth. They will then buy something they cannot afford with their “free” money with the intention of paying it off with the next paycheck. While that may seem like a good intention, what really happens is over the course of the month they have bought five or 10 items with the same thinking and the bill comes in four times larger than their paycheck and they are forced to pay less than the total amount, and the cycle starts all over.
The only way to avoid a situation like this is to only use the money you have. If you cannot afford something, if you do not already have the money, do not buy it. One way to do this is to use your credit card on gas and bills – assuming you have the money to cover those purchases. These items are generally paid every month, and the cost is known. This will force you to use your credit card on only things that you have budgeted.
2. Watch your statements like a hawk
It seems silly, but another way that individuals get caught by the credit card beast is by not knowing how much they have already placed on their credit cards. In fact, I have heard of a number of individuals that only knew how much they had spent when they either got their statement, or the credit card was declined because it was maxed out. This is a terrible way to manage your money. If you only ever looked at your bank account when you were told there was no money in it, you would be in a world of hurt.
The best way to avoid this is to use the app that many companies provide. You can check the app regularly. This gives you the added benefit of seeing if out of the ordinary has been purchased – protecting you from fraud. In some cases, you can even have the app send you balance updates after purchases.
3. Pay off your entire statement balance every month
The last rule I would recommend you follow is the most important, pay off your credit card bill fully every month. The first two rules will help with this. If you managed how much you spent, paying it off every month should not be hard – 15% interest rates are no joke. The only way to avoid them is to not be charged. The only way not to be charged is to pay off in full every month. Do not fall into the trap that the minimum is all you have to pay. The minimum will keep you in debt for a long time.
The best ways to avoid the minimum is to follow rules one and two, but also by keeping your credit card limit low. Having a $10,000 limit might seem great until you have maxed it out and need to pay it back. On the flip side, if your limit is set at $500, it is much easier to manage and is a cap on your spending. In a similar vein, not using a credit card at all – the Dave Ramsey advice – will also help you not get caught with a huge bill.
When it comes to credit cards, there are a lot of benefits and convenience. However, the bite of debt is worse. If you do not trust yourself, do not use credit cards. It is far better to lose out on some convenience than to be in a pit of debt. However, if you can be disciplined, you can tame the credit card beast.
Please note: I am not a certified financial planner (CFP), however, my comments are made based on personal investigation and experience.
Quote of the day: Rather go to bed with out dinner than to rise in debt. – Benjamin Franklin
