Credit cards are an excellent way to build credit, save for big purchases, and help you stretch your budget during the holidays, but many of us are too scared to use them. The convenience of credit cards can cause debt to accumulate quickly, so you’ll need to use credit responsibly.
How to Use Credit Cards Responsibly and Avoid Debt
It makes sense why some people would prefer to avoid credit cards altogether. However, that choice can impact your financial future. Instead, use them responsibly by using these tips.
1. Consolidate Your High-Interest Credit Card Debt
If you’re trying to build better habits because your previous spending has landed you in debt, know that you can get back on your feet with a consolidating credit card loan. These loans allow you to pool all of your credit card debt into one low-interest loan, making payments manageable.Since a debt consolidation loan cuts down on your monthly payments, you’re more likely to pay your debt off in a shorter time period. This can help you build your credit and budget. Be sure to close your other credit card accounts, so you aren’t tempted to use them in the future.
2. Only Spend Within Your Means (Don’t Go Over!)
For the uninitiated, credit cards can feel like “free money.” That attitude is exactly why the average American is $90,460 in debt—the value of credit isn’t realistically assessed. Sure, credit can get you things you otherwise couldn’t, but it can also land you into extreme debt.To avoid this scenario, pay your balance in full each month. If you’re making a larger purchase, calculate if you can pay off more than the minimum payment each month to cut down on your interest. The more debt you have, the more interest you’ll incur on your credit accounts.
3. Make All of Your Credit Card Payments On Time
Equifax, one of the three big credit card bureaus in the US, considers your payment history as the most important factor when calculating your credit score. If you’re unable to make your monthly payments on time (before the next billing cycle), you’ll be subjected to steep fees.Keep in mind that this doesn’t mean you have to pay off your entire credit card balance on time, just your minimum monthly payment. Consider making multiple payments a month, if possible. At the very least, set up an automatic payment schedule or a notification before the due date.
4. Keep Your Credit Utilization Low (Credit vs. Debt)
Credit utilization is another way credit bureaus will calculate your credit score. To determine your utilization ratio, bureaus will analyze your available credit vs. used credit. For example, if you have $5,000 in available credit and $2,500 is being used, your utilization ratio is at 50%.When applying for a loan, lenders will examine your utilization ratio to see if you can realistically take on more debt. Lenders prefer borrowers to have a utilization ratio below 30%, as that says you’re able to pay off your debt. It also means you won’t be drowning in credit card interest.
5. Don’t Open Too Many Accounts In a Short Period
Lenders will make a soft or hard credit inquiry whenever you want to purchase a financial product. A soft inquiry won’t impact your credit score but won’t give the lender your full credit report. A hard inquiry will affect your credit score, so ask all lenders which inquiry they’ll pull. While credit bureaus will count multiple hard inquiries as “one inquiry” if you’re shopping for a loan, opening multiple lines of credit at once will negatively impact your credit. Wait 6 months to a year before getting another credit card to manage your spending and high credit score.