It’s hard to imagine a world without credit cards, because they make it so easy to reserve a hotel room, flight, or rental car—and to conveniently purchase gas, groceries, gifts, and more.
You may use a credit card to build credit —and potentially earn cash reward points, among other benefits. With a credit card, you don’t have to carry cash, debit cards, or checks if you don’t want to, plus you can order items with your card and, if they don’t arrive in satisfactory condition, you have leverage to get your money back (limitations apply).
Credit cards are used by some as short-term loans and, if you pay your balance in full each month by the due date, it’s essentially a no-interest short-term loan (though keep in mind that some credit cards charge an annual fee). If you unexpectedly get hit with an emergency home repair, a medical bill, or some other unanticipated expense, you could pay them using your credit cards.
The challenge comes in, of course, when you can’t pay your balance in full in a relatively short time. The average credit card interest rate for existing accounts is a whopping 14.4% , and interest charges add up very quickly. In this post, we’ll share some very high-level tips that may help you use your accounts responsibly and may help you get your credit card balances under control.
Before we get started, though, we want to point out that none of this should be taken as financial advice. And we know this goes without saying, but always consult a qualified and licensed professional if you feel you need help with your finances.
1. Avoiding Making Too Many Impulse Purchases
How many is “too many” depends upon how much your impulse purchases cost and how easily they fit into your budget.
If you know you can pay off your credit card balances and otherwise meet your monthly expenses and savings goals, then that’s an entirely different situation from one where your impulse purchases are too large to be paid off each month and/or keep you from meeting other financial responsibilities or goals.
If you enjoy making spontaneous buys, then you may consider including this as a line item in your monthly budget and then sticking to it. This could add enjoyment to your life without causing financial problems.
2. Using the Right Credit Card
If you sometimes use your credit card for purchases that you know will take a few months to pay off, as just one example, then it makes sense to use one with the lowest interest rate available. That way, when you do have interest charges, they’ll be as low as possible.
Or, here’s another scenario. Let’s say you’ve just made a major purchase that you’ve budgeted to pay off in six months. It might make sense to transfer the balance to a zero-interest credit card. These credit cards typically offer a no-interest introductory period before reverting to the card’s regular interest rate and annual percentage rate (APR) which, by the way, could be quite high.
This can be a great strategy as long as you can pay the balance off in full during the introductory period. If not, you might end up owing at a higher interest rate than you would have before you’d transferred the balance.
And here’s another catch. Sometimes, if you have a remaining balance when the introductory period ends, the company collects interest on your original principal , not just the remaining balance. So, in that situation, nothing was really free.
It may also be a good idea to consider annual fees (if any), as well as cash back options and other perks, when choosing the best card for you.
3. Taking Advantage of Benefits Offered
For each of your credit cards, you may be eligible to sign up for rewards programs they offer to get the most from your card.
See what perks are being offered—if you’re not sure, you could check the card’s website or ask the credit card company for specifics. Once you know what they are, you can choose the ones you like and use them as strategically as you can.
You may discover that the card(s) you have don’t have the best benefits match for you. For example, perhaps you’re a frequent flyer. If so, some cards have better air-travel benefits than others. If you drive around the country instead, you could find one that offers the best cash-back deals on gas.
If you switch cards, you might want to avoid closing the old one—that’s because canceling it might ding your credit rating . (If you pay a fee on your old card, though, it may make sense to cancel.)
Finally, if you get rewards points, you might want to consider how best to use them . Sometimes, you can get a bigger bang for your buck if, say, you use your rewards points at an approved store rather than opting for cash back.
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4. Signing Up for Automatic Payments
To avoid missing payments or making them late, you could sign up for an automatic payment plan with the credit card company.
You could also sign up to receive reminders when payments are due (by text, for example, or by email), either through the credit card company or via a calendar app. What’s most important is coming up with a plan that accomplishes your goals in a way that works best for you.
5. Regularly Checking Your Statements
Mistakes do happen on credit card statements and, unfortunately, fraudulent activities can affect your account. So you might want to check your statement every month to ensure that you’ve made all the charges that appear on each statement, and that any payments you’ve made are reflected.
If something is missing, you could check the dates on the statement to see if the transaction may have happened, for example, right after the statement cut-off date. If something seems off, it can’t hurt to contact the credit card company to verify.
Tackling Outstanding Balances
Maybe you’ve put together a great plan about how to use a credit card responsibly. But if you have significant outstanding credit card balances, you might want to address that as part of your strategies to truly make a difference.
Let’s face it: Credit card debt can be hard to pay off—and here is one of the reasons why. Many credit card companies charge compounding interest , which means that not only will you owe interest on any outstanding balance, you’ll also end up paying interest on the interest.
That’s because this interest is calculated continually, then added to your balance—and may be compounded daily. So it’s easy to see how fast balances can keep going up—and up and up. It could take a decade to pay off a balance of only $5,700.
Interest compounds even when you make required minimum payments. It compounds unless you pay off your balance in full. To get an idea of what unpaid interest could mean for you, use our credit card interest calculator.
Consolidating Credit Card Debt With a Personal Loan
To break this debt cycle, and depending upon the terms offered, it may make sense to consolidate your credit cards into a personal loan. Reasons could include:
• You could qualify for a lower interest rate on a personal loan. Lower interest rate = less interest owed overall = more of your money going to pay down the principal (depending on your loan term).
• Most personal loans offer a fixed rate option, which means the interest rate does not change over the life of the loan. This can be helpful when creating a budget, since you know how much is due each month in terms of payment.
• A personal loan to consolidate credit cards could lower how much you’re paying each month on what you owe and depending on what term you choose.
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