Credit cards are great tools. They are in essence short-term, immediate loans, and we’ve all been in a position where the things we need to buy don’t perfectly match up with the money we have available to buy them.
Like any powerful tool, though, credit cards can be dangerous when not used carefully. Use them too easily and too frequently, and you can find yourself saddled with a bunch of debt, which only gets harder to pay off the bigger it gets.
Here, are some tips for using credit cards the smart way:
Keep track. First, and most importantly, pay attention to which credit cards you are using for what, and how often you are using them. By carefully tracking your purchases, you may find that you don’t really need two or three credit cards, and would be better off with one. If this is the case, consolidate. In turn, this will make it even easier to keep track.
Remember the real costs. When you use a credit card to pay for something, be sure to factor in the real cost: not just the purchase price, but how much you will need to pay in interest before the purchase is paid off. If you carry a monthly balance, that new TV or those concert tickets can end up costing you a lot more than the number on the price tag.
Spend carefully. By keeping track of your credit card purchases and realizing how much they can actually cost you, it’s easier to see when you don’t really need to buy something. By getting in the habit of spending more carefully, you can decrease your dependency on credit and increase your own savings. And of course, the more you build up your savings accounts, the less you will need to resort to buying on credit in the first place.
If something sounds too good to be true… It probably is. There are definitely pros to using credit cards: besides helping to establish good credit history, you can also take advantage of the many incentive programs that different companies offer. Whether its miles, points, or cash back on purchases, some good things can come from using credit cards. However: if you use your credit cards to get the rewards, you might spend money you wouldn’t have spent otherwise, and if you carry over a monthly balance (and so have to pay interest) the actual cost of your purchases might outweigh whatever rewards the credit card companies throw your way.
Pay down your debt. If you are already carrying credit card debt, you should prioritize paying it down as soon as possible. While making minimum payments will allow you to stay afloat, in the long term it will end up costing you a lot more money. There are different ways to go about paying down your debt, but whichever way you choose, the faster you can do it, the more money you will actually save in the long run.
If you don’t have debt, keep it that way. Easier said than done, right? Maybe so, but by using credit cards smartly, you can make sure you minimize your monthly balance, and thus the money you owe in interest.
Create a dedicated savings account to pay off credit cards. By opening a savings account that is specifically for paying off your credit cards, you can budget your money appropriately, and make sure you only spend on credit what you can pay back from your savings account by the end of the month. That way, you get all the benefits of using credit cards (good credit history, rewards and incentives) with none of the drawbacks (crushing interest payments).
Enroll in an automatic savings program. As we’ve mentioned here before, saving money can be tough. But by enrolling in an automatic savings program, especially one that sets aside a little bit of money every time you make a purchase, you can quickly build up your savings without having to think about it. At the end of the month, you can use this money you didn’t even notice saving to pay down your credit card. Have excess savings? You can either:
• Leave it in your credit card repayment account for next month,
• Withdraw and spend it now, or (here comes the one we recommend!)
• Transfer it to your emergency fund, to be used someday when you really need it.
By using credit cards minimally, paying off the balance every month when you do use them, and investing in your own savings accounts instead of servicing interest payments to credit card companies, you can make sure that you are financially secure.
And—to blatantly rip-off one credit card company’s famous slogan— The peace of mind you get knowing that you have your own money to rely on and aren’t stuck in a constant cycle of borrowing and paying interest? – Priceless.