By now, you have a basic understanding of what debt is and the common reasons people fall into debt in the first place.
It is now time to explore one of the most important financial tools around: credit cards.
Credit cards can also be, when used incorrectly, a surefire way to make your debt problem even worse than it already is. In fact, credit card debt is one of the leading types of personal debt in the United States.
But credit cards are essential in the modern day and age. When used correctly, they can help you borrow money to cover large purchases and build your credit history. As you might be aware, a strong credit score is necessary to take out a loan or a mortgage, lease a new apartment, and even rent a car while traveling.
Simply put, it is hard to live without a credit card. Whether you are looking for your first card, recovering from past credit card misuse, or just want a few pointers, this chapter of The Definitive Guide to a Debt Free Life is for you.
Think of this chapter as a “user’s manual” for your credit card. This is how a credit card should be used.
Few of us know how to use our first credit card correctly. In fact, many of us have the complete wrong idea about how our first credit card should be managed.
The most important thing to remember is that you should ease into using your new credit card slowly. Many of us get our first credit cards when we are as young as eighteen and it can be hard not to rush around and max your card out.
Do not do it!
Easing into using your new card consists of making small charges that you know you will be able to pay off on time. Pay off each of these small charges consistently and, more importantly, in full at the end of each month.
It is a common myth that credit cards can be used to build credit by covering purchases you do not have the money to pay off. The opposite is actually true.
Small purchases you already have the money to cover will more effectively and successfully build up your credit score in both the long-term and the short-term. (About.com)
Build Good Habits
When you first get started with a credit card, you should strive to build good credit habits.
A surefire way of doing this is by using your credit card to make one small recurring purchase each month. A monthly subscription or a monthly utilities bill is the perfect way to do this.
Stick with this single monthly charge for at least six months before charging any other purchases to your card.
Following this technique will help instill two essential habits in you:
- The ability to stay below your credit limit.
- The ability to pay off your balance in full at the end of every month. (BetterMoneyHabits.com)
Making Bigger Purchases
After you have learned to stay below your credit limit and pay off your balance in full at the end of each month, you are ready to make bigger purchases.
Even if you are an experienced credit card user, you should make sure you are capable of making small payments before charging for something bigger, especially if you have a history of credit card misuse.
Though you are now prepared to make bigger purchases on your credit card, it is still important to prevent yourself from going overboard. Make sure that your new purchases are still relatively low.
A good rule of thumb is to use 30% of your credit limit or less.
You should also set the money for your payment aside as soon as you make the charge on your credit card.
This way you will absolutely, one hundred percent have the money available when your monthly bill comes in. Setting it aside from the get-go ensures that you will not “accidentally” spend the money before making your payment.
In addition to playing it safe, taking things slowly, increasing your charges slightly over time, and making sure you can send in your monthly payments on time will improve the chances that your creditor will increase the credit limit on your card. This allows you to charge more to your card.
Even when your credit limit increases, you should still never spend more than 30% of your credit limit.
You should never use a credit card irresponsibly. As mentioned above, this is the number one way that people fall into debt. It also often forces your creditors to lower your credit limit or possibly deny you a card altogether. (About.com)
At the core of it all, just remaining cautious with your spending is the key to using your credit card in the right way.
Starting small and making bigger purchases only when you are sure you will be able to repay them on time is the only safe way to use a credit card.
As your credit limit increases and you are able to charge more, the tips below will come in handy.
- Focus on Self-Discipline – When it comes to using a credit card correctly, self-discipline will be your best friend. You absolutely have to be able to tell yourself “no” when you know you do not have enough money to cover a purchase that you really want to make. Furthermore, it is essential you can keep yourself from using the money you set aside put for your monthly payment on something else.
- Keep Track of Your Activity – It is all too easy to lose track of how much money you have charged and where you charged it on your credit card. For this reason, it is a really good idea to monitor your activity online. Most credit card companies offer such monitoring services today.
- Have a Back-Up Plan – Accidents, emergencies, and other unexpected situations happen to the best of us. While there is no telling when or even if one will happen to you, it is a wise move to have a back-up plan handy for credit card payments. If unexpected expenses arise that prevent you from paying off your monthly balance in full, try your best to make at least the minimum payments. At the same time, you need to have the self-discipline to put your card away and not use it again until you are back on steady footing. (WiseBread.com)
That is it! You now know what it means to use a credit card correctly. Doing so will keep you on steady financial footing, boost your credit score, and keep you out of debt.
Remember that building great credit takes time. This means that you should not rush it. Use your credit card wisely and responsibly and positive results will follow.
Your next step on the road to a debt free life is to learn how to get, read, and understand your credit report.
We cover all of these things and more in Chapter 4: Getting, Reading, & Understanding Your Credit Report. Here we go!