Credit cards provide a very convenient way of managing cash flow and also have great rewards such as cash back and airline miles. However, a good number of people get into financial trouble when using credit cards because they lack responsible financial habits. In order to avoid accumulating serious debt, you need to develop good financial habits.
What is a Credit Card?
Let’s start off by covering the basics. A credit card is essentially a contract between a financial institution and a cardholder. The credit card allows the cardholder to make as many purchases as they need using the institutions funds on the condition that they will pay back the money at the end of the month. If the money is not paid back in full by the end of the month, the institution will charge interest on the balance.
Credit cards are based on a revolving line of credit. This simply means that the cardholder can borrow any amount of money within their credit limit and they do not need to make the full payment at the end of each period. In fact, the credit card issuers are counting on the cardholder NOT making the full payment so they can charge interest. If every cardholder paid off their balance in full every month, credit card companies would go out of business.
The key figures you need to look for in credit offers include:
If you are a regular reader on this blog, you know the importance of paying your balance in full each month to avoid interest. But still, before applying for a credit card you should consider the interest rates you will be charged if you do not make payments in full each month.
This gives you an idea of how much it is going to cost you to use the credit card. Knowing this enables you to decide whether or not you really want the card.
It is also very important to consider the annual fee you will be required to pay for a credit card. If you plan on using the credit card only for emergency reasons, you should go with a card that has no annual fees. However, if you plan on using the credit card for everyday purchases, it might be wise to go with a card that offers great rewards, and along with those rewards might come an annual fee. Just make sure that the collective value of the rewards you get from the card will exceed your annual fee.
A credit limit is the amount of money your lender will allow you to borrow at once. The lender determines your credit limit based on a number of factors including your living expenses and your income.
It is also important to know how long you have before you are required to make repayments. Find out if the lender offers interest-free periods. Also make sure they don’t charge interest if you pay your balance in full every month. Some companies will still charge interest even if you make the full payment at the end of the month.
Developing Responsible Habits
Now that you know what to look for in a credit card, let’s talk about how to actually use it responsibly. If you follow the guidelines below, your card will become an asset to you. If you don’t follow the guidelines, your card will become a huge liability for you.
Create a budget
A budget is important because it lets you see how much money is coming in and going out every single month. There are plenty of budgeting apps out there to make this process simple. Once you have your budget, stick to it and avoid overspending.
Make full payments every month
In order to avoid late payment penalties and interest, you should commit to making full payments every month. Make sure you make all payments within the interest-free period in order to save money. If you have a hard time remembering the dates, you should consider setting up an automatic transfer to repay the money automatically every month. This will prevent you from falling behind on your payments.
Use your credit card to manage your cash flow
A credit card is a very convenient way of managing cash flow. It enables you to take care of financial emergencies and other responsibilities on time when you do not have enough money. However, make sure you also make the credit card payments on time in order to maintain a good credit history. If you use your credit card to effectively manage your cash flow instead of buying unnecessary things, you are less likely to get into credit card debt.
Use Credit Cards For Everyday Purchases
Using credit cards for everyday purchases can be very advantageous. You do not get charged extra for making purchases with your credit card, so as long as you pay your balance in full every month you will get the benefit of all the rewards without being charged interest.
Avoid too many withdrawals
You are not charged any interest when you use your credit card to make purchases. However, this is not the case with withdrawals. Every cash withdrawal you make is charged an interest regardless of whether or not it is done during the interest-free period. Therefore, you need to minimize the number of cash withdrawals you make in order to reduce the extra costs.
Managing Your Debt Responsibly
If you already have quite a bit of credit card debt, there are several things you can do to manage the debt responsibly:
- Use your credit card only when it is necessary and commit to making all your payments on time.
- Set automatic payments so you don’t forget.
- If you have multiple credit cards, start by paying off the one with the higher interest rate.
- Consolidate with a zero interest balance transfer offer.
Credit cards offer great benefits. However, the only way to enjoy the benefits is if they are used responsibly. As long as you follow the guidelines in this article, you will reap all the rewards of using credit cards without driving yourself into unmanageable debt.