As a tool, credit cards can provide you with the leverage you need to make so many things easier to accomplish. However, like any tool, credit cards can also become a debilitating instrument when used indiscriminately.
With that in mind, let’s take a look at some tips for using credit cards wisely.
It’s Just an Illusion
A credit card can put immense amounts of spending ability in your hands. However, it’s important to remember that capability is an illusion. That money isn’t yours. It’s borrowed, and what’s borrowed will have to be paid back. So rather than buying things just because the card will let you have them, ask yourself if this is something you really need — or is it something you merely want? Credit cards can make it easy to get the two confused. However, when the bill comes in, you’ll realize the “want” you thought you needed was just an illusion.
Two Credit Cards are More Than Enough
The more credit cards you allow yourself to get — yes, allow yourself — the deeper your potential pit of debt will become. Managed properly, there is no reason to have more than two credit cards.
Lingering Balances Get Larger Every Day
Most credit cards, while they quote an annual percentage rate (APR), actually calculate interest on a daily basis. This is known as the daily periodic rate (DPR). To find yours, divide the quoted APR by 365. The result is the multiple by which your outstanding balance grows each and every day. This is why credit card debt can get out of hand so quickly. Customer reviews for Freedom Debt Relief often cite this as a source of their woes when seeking credit card debt help. The amount owed grows every single day. To stop it dead in its tracks, you must pay your outstanding balance off in full every month.
Minimum Monthly Payments Are a Trap
That sigh of relief you breathe when you learn your card issuer only wants a small percentage of the outstanding balance to consider your account up to date is exactly what they want you to feel. Don’t get it twisted though, it’s not because they want to make your life easier. It’s because they want to keep you in debt for as long as legally possible.
Let’s say you have a balance on your card of $1,000 at an APR of 18% and the minimum payment is 2.5% of the outstanding balance monthly – $25. With that monthly payment, it will take you approximately five years to repay that $1,000 debt. And oh, by the way, you will pay a total of $1,538.62 to do so. Meanwhile, all other things being equal, a $100 monthly payment will retire that debt in 11 months for $1091.62.
To thwart this trap, avoid charging more than you can comfortably pay off within a month. If you find you must carry a balance (emergencies do happen), make every effort to pay as much as possible toward that debt each month. The sooner you pay it off, the less it will cost you to do so.
Build Up an Emergency Fund
Make every effort to build an emergency fund equivalent to at least six months of your monthly expenses. Put it in a money market account, or some other types of high-interest savings account that is readily liquidated. This way, should your income experience a disruption, you can carry on without falling back on credit—hopefully long enough to get things back on track. Or, should an emergency necessitating a large expenditure on your part arise, you’ll have the cash on hand—rather than going into debt to deal with it.
These tips for using credit cards wisely will help you avoid falling into an unmanageable debt situation. Again, credit cards can be a wonderful tool when used strategically. But, you have to be careful to use your cards, rather than letting them use you.