Out of all the financial products out there, credit cards can inspire some of the strongest opinions. Some people see them as a useful tool for secure purchasing or even earning rewards on their purchases, while others see them as nothing more than a dangerous debt trap. But love ‘em or hate ‘em, one thing is for certain: We’re nearly all using them — more than 70 percent of American households have at least one credit card according to U.S. Census Bureau data.
As with all things, the trick to how beneficial a credit card can be comes down not just to the product, but how you use the product. Strict credit card management can enable consumers to take advantage of all the benefits of credit cards without falling into debt. The key here, however, is the word “strict.”
Here are tips on how to manage a credit card in a way that will help it benefit your life, not sink you into debt:
How to Manage a Credit Card in Four Steps
1. Use Credit Cards in Conjunction With Your Budget
One of the biggest problems with credit cards can come when they’re being used as an emergency fund. Make no mistake: Although credit cards can be useful in an emergency, they are a sorry substitute for an emergency fund. Putting a large balance on a credit card that isn’t in your means to repay within a few months can quickly turn convenience into expensive debt.
Instead, consider using credit cards in conjunction with your budget. In other words, as you set your budget or spending plan for the month, you can use your credit card to pay bills or pay for purchases that you’ve already planned without exceeding what you already planned on being able to repay. That way, you get the credit-building benefits of credit cards without the deep debt (if you repay the statement balance in full each month).
2. Strive to Pay the Full Balance Each Month
The only way to stay out of credit card debt without avoiding credit cards altogether is to pay the balance in full each month. If you used your credit card in conjunction with your budget, this should be feasible. This might be harder to do if you use your credit card as a supplement to your budget or as an emergency fund.
Most credit cards have a grace period, which starts at the end of your billing cycle and ends the day your payment is due. (This typically only applies when you didn’t carry a balance over from the previous month, and transactions such as cash advances and balance transfers might not have a grace period at all.)
If you pay your balance in full during the grace period, then you won’t incur any interest on that balance. It’s not required that credit card companies have this grace period, but most do. What is required is that the statement is sent to you no later than 21 days before your payment is due, ideally giving you enough time to make that payment before the grace period is up.
If paying the balance in full each month ever becomes untenable for you, at the very least, avoid paying only the minimum payment. Minimum payments are typically only two percent of your balance (plus interest) and won’t enable you to make a meaningful impact on your debt. To see just how little the minimum payment does, take a look at your credit card statement. There, you should be able to find a chart detailing just how long it will take to pay off your balance if you pay only the minimum each month.
3. Always Pay the Bill On Time
All that said, things happen, and there might be a time when you simply can’t pay more than your minimum payment. In that case, make sure you always pay on time to avoid late fees. (Some credit card companies waive the fee for the first late payment, but many charge up to $39 per late payment.)
Besides the fact that late payment fees can be expensive, late payments can hurt your credit. Both of the major credit scoring companies (FICO® and VantageScore®) rank payment history on top of their credit scoring formulas — and it only takes one late payment for your score to take a hit. Even if you can’t keep yourself out of debt, help protect your credit by always paying on time.
4. Know What to Do If the Balance Becomes Too Much to Handle
If you end up only being able to pay the minimum and don’t see a change possible in the coming months, it might be time to explore other options.
One such option is called debt consolidation, which is the act of paying off debt with a credit card or loan, ideally at a lower interest rate. Consolidating debt can help you secure low or no-interest credit for a limited period of time (if your credit is good enough to get approved), and that can enable you to make more headway on paying off that total balance.
Two ways to consolidate debt are through a balance transfer credit card or a personal loan used to pay off debt. Balance transfer credit cards can be an attractive option because they usually come with an introductory offer of no interest for a certain period of time.
The downside is that your remaining balance at the end of that time will be charged at the card’s typical purchase interest rate, which can cause a quick spike in the balance. Some people do a balance transfer again right before this happens to avoid the spike — but a better way could be to pay over the minimum in the amount you’d have to pay each month to be debt-free before the introductory offer expires.
On the other hand, personal loans used to pay off a credit card will come with interest, but they also come with a fixed payoff date. This can be an attractive option if you want to know exactly when you’ll be out of debt and avoid the risk of falling into new credit card debt.
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Either way, debt consolidation can help you pay down high-interest credit card debt, but the benefits only have staying power if you don’t accrue more debt in the meantime. If you want to remain free of credit card debt after you pay off your consolidated debt, the only way to do so is to pay your balance in full every month.
Good Credit Card Management Is All About Building Habits
Learning how to manage a credit card can seem like a lot of work, but really it just comes down to building strong habits. Once you get used to using your credit card in conjunction with your budget and paying your balance in full each month, you can enjoy the credit-building benefits of credit cards without falling into debt.
And what if you end up needing to use your credit card in an emergency? Or you have to carry a balance over from month to month? Knowing if it’s time for debt consolidation can prevent you from going down the path of credit card debt for so long that the balance becomes nearly impossible to manage. Things happen, and the more knowledgeable you are about your options, the better.