Credit cards have always been my Achilles heel, until recently. I don’t know, it was something about buying now and paying later that always appealed to me. I remember when I got my first credit card, I was 18 and it was my sophomore year in college. Someone thought that it was a great idea to give me a credit card with a $500 credit line. Back then, $500 felt like a lot of money! I think it took me all of two months to max that credit card out. Was it irresponsible? Yes, absolutely. But I know that a lot of people have fallen victim to this. We’re not bad people. We just never learned how to use credit cards responsibly.
As I’ve embarked on this debt-free journey, I’ve learned a lot about credit cards, both their benefits and drawbacks. Yes, credit cards can be dangerous and can get you into financial trouble. But that’s only if you’re not smart and strategic when you use them. In fact, credit cards can be a pretty powerful financial tool.
Understanding Credit Cards
Credit cards are simply a line of credit that can be used to make purchases, complete balance transfers, or get cash advances. Credit cards serve many different functions and come in varying forms. There are all types of credit cards out there. Here are 9 of the most common:
- Gas and Grocery
- Balance Transfer
- Cash Back
- 0% APR
I’m not going to tell you what types of credit cards to get. However, I will share with you the types of cards that I use and the ones I avoid. Personally, I like the Cash Back, 0% APR (for large purchases) and travel credit cards. I would stay away from the retail cards, they just don’t make sense and you’re confined to using them at one store. (As I said, that’s just my preference.)
How to Use Credit Cards Responsibly
Never Miss a Payment
I mean I think this is pretty straight forward. Remember when I said that credit cards are dangerous? Credit cards are one of the quickest things that can impact your credit (good and bad). So make sure you’re paying your bills on time!! You can read more about how payment history can affect your credit score here.
Keep Credit Card Usage Low
Credit card utilization is a biggie. A simple rule of thumb when it comes to using your credit card, keep your credit card utilization under 30% of the total available credit. I explain credit card utilization here.
Only Charge What You Can Afford
I feel like this rule and credit card usage go hand in hand. Just because you have a credit card, doesn’t mean it’s ok to just blow it on things that you otherwise wouldn’t be able to afford. This was my downfall, I was spending way beyond my means, and I’m still paying for it! Do not max out your credit cards unless you’re able to pay them off in full in 30 days or less.
Read about my bad spending habits here.
Pay More Than the Minimum
You should never just pay the minimum. Always pay more if you’re not going to pay off your balance in full. If not, you’ll be paying a lot in interest which will result in you actually paying back more than what you purchased in the first place.
Limit the Number of Cards You Use
When you have multiple credit cards, it’s so easy to lose track of what you’re actually spending. If you’re not careful, those balances on multiple credit cards will add up QUICK! Trust me, this is exactly what happened to me. If you must use multiple credit cards, I’d say a good rule of thumb is having no more than two or three cards in rotation if you must.
Using credit cards responsibly requires self-discipline (something I lacked for a long time). This requires knowing when to say no to yourself and keeping frivolous purchases to a minimum. Trust me, it’s so easy to accumulate credit card debt. Take it slow and be mindful of what you are using them for.
Monitor Your Activity and Read Your Credit Card Statements
Monitoring your credit card usage and looking through your statements is a good habit to develop. This way you can stay on top of your spending and track it more closely. You’ll also be able to spot fraud more quickly.