Using Credit Cards Wisely

Having a credit card can be a very important financial tool for many individuals. In general, credit cards are safe, reliable, and convenient to use. The responsible use of a credit card will reflect positively on your credit report, putting you in a better position should you need to secure a larger loan such as a mortgage or car loan. However, for some people, managing a credit card is harder than getting one.

Anytime you use a credit card, you are borrowing money you are obligated to repay. What you purchase does not matter – whether it’s a $500 set of tires or a $6 lunch from McDonalds. If you don't pay your balance in full each month, your creditor will add interest to the total amount you owe. The key for any money management system as well as for credit card use is to make sure that you are not spending more on a monthly basis than you are bringing in.

Get to know all of the responsibilities in using a credit card. Educate yourself on exactly how a credit card works. Is a credit card or borrowing money really necessary, or would another option such as cash or a debit card work just as well? Do you understand how interest is charged? How fees will be assessed? How minimum payments and due dates are determined?

Choose wisely. When selecting a credit card, be aware that all cards are not the same. Compare different cards based on your needs and the card terms. Look for the following:

  • The annual percentage rate (APR), which is the amount of interest you will pay if you do not pay your balance in full each month. Also, be aware of low introductory rates that might increase after a short period of time (usually 12 months or less).
  • Fees - annual fees, late payments, balance transfer fees, cash advance fees, over the limit fees, etc.
  • Credit limits: Your credit limit should not be so high where you are tempted to utilize more credit than you can realistically afford.

Limit the number of cards you have. The average consumer has between 3 and 5 credit cards – perhaps one or two major bank cards (Visa, MasterCard), and another 3 or 4 retail or specialty cards (Lowe’s, BP Gas, etc.). Having too many credit cards may result in the excessive use of credit.

Keep track of your monthly credit card spending. Understand when and why you will be making purchases with a credit card, and make sure to budget appropriately for the monthly bill. Keep your receipts, and avoid the temptation to impulse buy and overspend for items you don’t truly need.

Don't spend more than you can afford to pay each month. Responsible use of your credit cards will help you establish a solid credit rating and avoid financial problems. In addition, using your credit cards regularly for items such as food, gasoline, and utilities, could be a sign that your monthly budget needs reviewing.

Here are some warning signs that you may be over-extending yourself with your credit card use:

  • You are only able to make minimum payments on your credit card debt and other revolving accounts.
  • You have recently been denied credit. If a creditor declines you, it means that they feel that your finances are either stretched to the limit or beyond.
  • You can't afford to save or are exhausting your savings to support your lifestyle. If you are not able to set aside savings on a consistent basis, there is cause for concern. If you are exhausting savings to keep up with your lifestyle, it’s a signal that you are living beyond your means.
  • Cards are near or over your credit limit. Your creditors set your credit limit based on your credit history, income and outstanding debt. If you are at or near this limit it is a good sign that trouble awaits you if some hard financial decisions are not made. Make it a goal to keep your revolving balances below 50% of your available credit limits. 
  • Your credit card balances are increasing.  
  • You rely on cash advances from the cards to pay your other bills. This is referred to as “Robbing Peter to pay Paul”.
  • You live pay check to pay check. Do you struggle to have any extra funds left over? Does all of your paycheck go toward groceries, bills and your credit card payments.
  • Collectors are calling you. Receiving calls from creditors is a sure sign of trouble.