Are You Credit Card Smart?

Posted by MoneySavvy on Jul 7th, 2010 | no comments home title

If your credit cards are getting you into debt, you are not alone. Many people find themselves falling further and further behind financially each month because of these cards.

Credit card debt is the worst kind of debt you can have. This is because the interest rate is compounded every month, whilst with loans it’s only compounded once a year. This makes a big difference, and if you pay anything less than the total balance, you will quickly find yourself in over your head.

So what do you do? Here are five tips for making sure you only spend what you are capable of:

1. Have a plan

Make sure to sit down at the beginning of every month and figure out how much you can set aside for groceries, gas, etc. Be determined not to go over that.

This is an incredibly simple but powerful tip that works every time. Many people are in debt simply because they don’t know how much they have to spend.

2. Keep track of how much you are spending

It’s not enough to plan at the beginning of the month and then forget it. Check your credit card statement at least once or twice a month to keep tabs on how you are doing relative to your budget.

This will also help you spot any automatic charges for services you are not using. For instance, you might have accidentally signed up for something online as part of a free trial and forgotten about it. If you don’t check your statement, you might get billed for something that you don’t use.

3. Use cards with rewards points

This is one of the best things about credit cards. Obviously there are many expenses you can’t do without. Food and utilities are obvious examples.

When you use credit cards with cash back, you are getting back 1%-3% for every dollar you spend. This is a huge advantage credit cards have over cash. You can then use that rewards money for anything you want.

4. Pay off the entire balance every month

As mentioned before, any balance that carries over from one month to the next gets interest added to it. If you are just making your minimum payments, you are slowly accruing a huge amount of debt. Therefore, getting rid of all your balance at the beginning of each month is crucial.

5. Use one low interest credit card

This is for a couple reasons. One, it’s much easier to keep track of one payment than many. If you have bills coming due at all different times, you have a high risk of forgetting about an expense.

Also, if you have a card that has a lower rate than anything else, then transfer your balance from the higher rated card to that. This just makes it easier to pay down your debt, because the interest will accumulate slower.

Getting out of credit card debt is not easy, but it’s not complicated either. It just takes diligence. Have a plan, stick to it at all costs, and you can become financially free very quickly.