This user guide is created to help you learn how to use your credit card responsibly. Credit cards are useful tools because they offer consumers many benefits including consumer protection, as well as possible rewards for using them, such as cash back rewards. However, like with anything else, there are also risks involved with credit cards. Using a credit card responsibly means understanding how to use the card to obtain the benefits of credit cards while avoiding the pitfalls of credit card debt.
To get the best results from using a credit card, you must understand how to use the card responsibly. You must understand how to treat the card as a payment method and not as a new line of credit to access more money. This user guide will explain safe uses of credit cards, prevent overspending, and how to avoid the “interest trap” that can result in you continuing to carry a revolving balance.
1. Create Budgetary Spends Limits to Limit Overspending
Create limits that will keep you from overspending. Overspending is the # 1 cause of debt problems.
Another important component of developing poor spending habits is the occasional “I’ll just buy this one item.” When you create specific rules for yourself, you are able to track spending against what you earn.
Some practical rules that will work well to help you avoid overspending include:
- Only use money that you have designated for that purpose in your budget.
- Create one credit card to use as your main spending account to simplify the tracking of your spending.
- Activate purchase and low-balance alerts to let you know every time you complete a transaction and also when your account is inactive for a certain period of time.
Check your account at least once per week, instead of waiting for your monthly statement.
2. Make Full Payments and Minimize Interest Charges
Second Strategy – Ensure that you make full payments on your credit card and reduce your exposure to interest charges. As previously discussed, interest charges are the biggest reason credit cards can be expensive.
Here are some ideas on how to pay for your purchases wisely:
- Pay the entire balance due by the end of the billing cycle.
- Automatically set up your account to make the minimum payment due by the end of the billing cycle.
- Make a partial payment during the middle of the cycle if you think you may go over your available funds.
If you cannot make a sufficient payment to meet your balance in full, the interest charges will accrue quickly and you might want to develop a payment plan to pay the outstanding principal amount due.
3. Utilize Credit Card Features and Limits to Lower Your Exposure to Losses
Third Strategy – Use the features and limits of your credit card issuer to lower your exposure to loss. When you implement these limits and safeguards in the beginning, they are likely to be the most helpful.
Some of the things you can do to use your credit card responsibly include:
- Maintain a low credit utilization ratio – Try to never use more than 50% of your available credit.
- Never use cash advances – They usually come with a high fee and will start accruing interest immediately after withdrawal.
- Take advantage of your card’s dispute and fraud protection – Immediately notify your card issuer if you notice any suspicious activity.
- Separate your “wants” from your “needs” – Consider using your card for planned expenses and don’t make impulse purchases.
You build controls into your card by setting those controls, not by relying solely on your self-control.
4. Selecting a Credit Card That Is Best For Your Needs
When looking for a new credit card, determine if the card fits your spending habits and if the card is easy to manage. It doesn’t make much sense to find a card that offers rewards for items that you rarely purchase.
Additional practical aspects to consider when selecting a credit card include:
- No yearly fee for beginners who just want to use the card for everyday spending.
- Rewards for the purchases you actually make (e.g., groceries, gasoline)
- Simple, straightforward terms with few fees
Your credit card should enable you to be financially stable, not encourage you to spend more.
Conclusion
Ultimately, the most successful and financially responsible individuals treat their credit cards as tools for convenience and protection, not as a means to extend their income. By implementing the three strategies outlined here (spend guidelines, full payment of the balance due by the end of each billing cycle, and utilizing the features of your credit card to manage risk) you can minimize your risk of becoming over-extended and enjoy the benefits of using a credit card without excessive costs or damage to your long-term financial goals.