If you aren’t already using a credit card, maybe it’s time to apply for one. Many people use credit accounts to pay for a variety of living expenses, like fuel for the car and groceries. In fact, the average U.S. adult has about $3,600 in credit card debt, according to CreditCards.com. While some borrowers use credit responsibly, others get hooked on overspending and end up with a mountain of unpaid credit balances that can to bankruptcy.
With credit card offers frequently showing up in the mailbox or on the computer screen, it’s easy to take advantage of low-interest rates and no-fee balance transfers. Before you know it, you could end up with six or eight credit cards – or thirteen, like a hapless thirty-something shopaholic mom did recently. When reality hits, consumers who find themselves carrying a number of credit balances slam on the brakes and take desperate measures, such as cutting up their cards or bagging them in the freezer.
But a little common sense goes a long way. Don’t wait until you start getting monthly statements to realize you’ve overextended your credit by making uncontrolled purchases. With forethought and planning, you can put your credit accounts to good use without going into extreme debt.
- Carefully compare credit card offers.
Don’t apply to the first ad to grab your attention when you happen to be short on cash. Compare two or more offers with respect to interest rate, payment amount (usually a percentage of the balance owed), and time constraints. For example, financial penalties for missing a payment or paying late include in some cases the possibility the lender will jump up the interest rate to a high percentage that means higher monthly payments. Some credit cards offer bonus points that can be redeemed for special gifts, while others pay a percentage of cash back to the borrower. Decide what is most important to you when choosing a creditor.
- Leave your credit cards at home.
When out and about on routine errands, avoid using credit when possible, and stick to cash. Studies show that people who pay with credit tend to spend more than planned, often for non-essential purchases. Charging fewer expenses will help to maintain lower balances so that you are making smaller payments with possibly less interest.
- Plan credit card use.
Review your monthly budget frequently to see where you are making unplanned purchases and spending more than you can afford. Set goals of using credit just for specific things, like fueling the car so you can pay at the pump. When doing discretionary shopping for holidays or special occasions, have an amount in mind that you want to spend to avoid buying pricy items.
- Separate personal and professional charges.
If you use credit to make work-related purchases, be sure to keep receipts for reimbursement, if allowed. A company credit card may be available for frequent expenses, so ask if one is available. A personal credit card used for business expenses should be reserved for just those things, which makes it easier to claim deductions at tax time by checking monthly statements or charge slips.
Overall, you probably do not need more than two or three credit cards. One can be used for everyday purchases. Another should be set aside for business or other special spending categories. A third might be reserved for emergencies, such as a major, unexpected car repair. Try to get a low introductory interest rate with no balance transfer fee on all your credit cards, and no fee for balance transfers if you are switching to a new account to save money. Credit cards are valuable tools that build responsible financial management when used appropriately.