A credit card can be a valuable tool if you know how to use it properly. Likewise, using credit cards irresponsibly can lead to a world of hurt.
If you need an example of how badly things can go, look no further than your neighbors, friends, and relatives. According to the most recent statistics, the average American household carries around $7,200 in credit card debt. Even worse, that figure tends to increase with each passing year, even as household incomes struggle to keep up with inflation.
Further, a 2001 study by Drazen Prelec and Duncan Simester titled “Always Leave Home Without It” surmised that individuals using credit are often willing to spend twice as much for the same exact item.
Why? Because, according to the study, using a credit card instead of cash — particularly on items with a hard-to-specify value, such as tickets — somehow muddles our fiscal judgment and lulls us into spending more than we’d planned.
The good news, I suppose, is that Americans are really awesome at using credit cards. According to the Federal Reserve, 53% of all purchases are made with credit. Unfortunately, we’re just not nearly as awesome at paying them off.
How to Use Credit Cards to Your Advantage
But if you want to use credit in the right way, you don’t have to forsake credit cards altogether — although that’s not a bad strategy if you know you’re prone to abusing them.
Instead, adopt a few simple habits that will let you enjoy the benefits of credit cards — cash flow flexibility and rewards perks, to name two — without the dangerous downsides.
Follow these tips to make credit your best friend (instead of your mortal enemy):
Pay your bill in full every month.
If you don’t want to end up like the “average American,” you need to stay out of credit card debt altogether, you need to make sure to use your credit card in businesses that use credit card processing for small business. That means charging only what you can afford and paying your bill in full every month — or even a few times a month if it helps you stay ahead of it.
Doing so may seem challenging, but this is the number one rule of using credit cards instead of letting them use you; it is truly the only way to avoid getting into credit card debt, and the only way to avoid paying interest on your purchases. (Trust me, you don’t want to do that: A 20%-off sale means next to nothing after you get whacked with an 18% finance charge.)
Never pay your bill late.
In addition to paying your bill in full, you should also make sure you pay your bill on time. Most issuers charge an ugly fee — often up to $39 — for a late payment. And since 35% of your credit score is based on your payment history, a missed payment can really ding your score.
Meanwhile, paying all of your bills on time is a great way to keep your interest rates low and improve your credit score – and your overall credit health – over time.
If you’re afraid you’ll forget and wind up missing your due date, set a reminder on your phone a few days beforehand or mark the date on your calendar. Another option: Adjust your online account settings so your bill is paid automatically on a certain day of the month through a direct bank draft.
Log into your account.
One reason credit is easier than cash to use and keep track of is because it creates a paper trail. When you use credit for all of your purchases, you don’t have to keep receipts for things like grocery and gas purchases. Instead, you can just log in to your online account to see where you spent money, how much you spent, and how much you have left.
Checking in often — at least once a week — can help you stay on top of your spending so it never spirals beyond your control. If you notice yourself pushing the limits of what you can afford to pay back this month, stop using your card immediately until you get the balance paid down.
Examining your account activity can also help you spot any money leaks in your spending. Are you spending way more at Starbucks than you realized? Most credit cards offer powerful tools on their websites to track your spending — use them to your advantage.
Use your credit card as a compliment to your budget.
If you’re disciplined enough, you can use a credit card as a compliment to your budget. This strategy usually involves creating a written budget, then using your credit card for purchases until you work through your predetermined spending limits. This is a great way to earn rewards for purchases you’d be making anyway, and to gain certain protections that only credit offers.
To stay on track, make sure to log in to your account once per week or every few days. Seeing your spending on your computer screen – in black and white – is sometimes the only way to let how much you’ve really spent sink in.
Know your limits.
If you’re worried that you might overspend, ask your credit card company to lower your credit limit to something you know you can manage on a monthly basis. They should be more than happy to oblige since they ultimately want you to pay the money back, and they can often make the credit limit change effective immediately. Not everyone wants a $10,000, $5,000, or even $3,000 limit on their cards, and that’s okay.
Another strategy you can try: Use your card until you’ve spent a self-imposed limit, say $500, and then put your card away in a drawer until the beginning of the next month – or until you pay your bill in full. This can help you stay on budget and on top of your bill while allowing you to maintain a larger credit limit that might be useful in an emergency.