7 Tips on How to Use your Credit Card Effectively
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Question: Everything seems to be costly these days — prices of basic commodities (especially gas) but my cash flow stays the same. To make ends meet, I am contemplating of using credit card but I’m nervous about reckless spending. I’ve fallen into the huge debt problem two years ago and fortunately got out but I don’t want to experience it again. I’m having thoughts of canceling my credit card but what if I’ll have to use it? – Screwed Guy
Answer: I’m happy to hear that you were able to get out of your predicament. It’s not easy to be stuck deep in debt beyond your paying capacity.
It could take you lots of sacrifice and unbearable payments until that debt disappears. That’s because interest charges continue to pile up while you’re paying what you can until the whole debt is paid off.
Another unfortunate consequence of being caught in a debt trap is having your credit reputation affected. In cases when unpaid debts have been turned over to collection agencies, credit card companies will not only cancel the credit card; they will also keep a record which may make it difficult for you to have access to credit in the future. For some people, legal troubles add to the list of headaches.
It’s good that you were able to successfully pay off your debt, and still have your credit card. While you may be wary of using it again for fear of overspending, it would be wise to keep your credit card for the following reasons:
It is a convenient form of payment. You don’t have to carry much cash or run to the ATM if you have your credit card. It will also make it easy for you to buy large ticket items such as appliances, or even pay tuition fees with just one swipe. When you’re traveling abroad, you don’t even have to pay using the foreign currency; your credit card, accepted all over the world, will do.
It is the accepted mode of payment for online purchases. With a credit card, you can buy goods from legitimate sellers, from books to software, without fear of having the money lost in transit. You can also easily transact with companies abroad while you are here using your credit card.
It is a valuable credit line available when you need it. Should you need cash, you can get a cash advance through your credit card wherever you may be. You’ll just need to go to an ATM.
It can be a useful tool in managing finances. (Now you know I’m not a big fan of Dave Ramsey that teaches total elimination of credit card!)You can organize to have all your utility bills automatically charged to your credit card, so you won’t have to worry about missing a payment. With the credit card bill, you can also see at a glance your expenses for the month.
How to make sure you don’t fall in debt again
Hopefully knowing how difficult it is for you to pay your credit card debt yrs ago, you may have learned your lesson already of not overspending. Never be afraid of using your credit card. Its not the credit card that’s the problem, its you! Follow the tips below on how use credit card effectively.
1. Know your credit limit. Credit card companies assign each cardholder a credit limit based on the cardholder’s capacity to pay. Every time you charge a purchase, run a balance against your credit limit to make sure you are still within the limit. Going over the credit limit may lead the card company to disapprove succeeding purchases.
2. Find out your debt ratio. This shows how much you owe compared to how much you earn. It is computed by dividing the total amount needed to pay debts by your take-home pay. The lower the ratio, the better.
Experts say no more than 15 to 20 percent of your monthly take home pay excluding rent and mortgage should be allotted for debts, including credit card payments. If you are over this percentage, hold off charging more purchases.
3. Set a monthly limit to charges and stick to it. From your debt ratio, you can decide how much flexibility you can have each month for charge purchases. Make a budget for all your expenses every month and from this you will see which expenses can be charged.
4. Shop as carefully with credit as you do with cash. In fact if you’re discipline enough, use cash. Using cash to purchase stuffs give you that “feeling” of your hard earned money running away from you. And you don’t want that feeling! Every time you are tempted to buy something, ask yourself if it is a need or a want. If it is something you don’t need right away, it is a want and therefore it can wait when you have the cash to spare. Prioritize the needs.
5. Pay more than the minimum amount in your credit card bill. This will minimize interest charges and will allow you to pay your debt faster.
6. Spend less that what you earn. Don’t purchase stuffs in hope of future earnings. Track your expenditure and income.
7. Always pay your bill on time. You’ll be charged a late payment fee on top of interest charges if you miss the due date. What I do to ensure that I don’t miss my due date is I use my mobile to trigger an alarm when due date is about to come.
By intentionally scrutinizing your spending and following guidelines above, you’ll use your credit card wisely—just the way it was meant to be.
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9 Responses to “7 Tips on How to Use your Credit Card Effectively”
Great post, i love credit cards for the fact of making spending easy, but you have to be responsible to make sure you do not send more than you make. And when times are bad, that is why you save money when times are good
By
Brian (Who am I?) on Sep 11, 2008
@ Brian - agree save money when times are good. Thanks for commenting.
By
moneyexpert (Who am I?) on Sep 11, 2008
“Set a monthly limit to charges and stick to it.” Absolutely agree - this is the most effective way to avoid credit card debt.
By
Vered - MomGrind (Who am I?) on Sep 11, 2008
You can do this with a debit card as well … “You can organize to have all your utility bills automatically charged to your credit card, so you won’t have to worry about missing a payment. With the credit card bill, you can also see at a glance your expenses for the month.”
Without credit, you will ALWAYS accomplish #6.
By
Fielding J. Hurst (Who am I?) on Sep 11, 2008
I agree with your comment “its not the credit card that’s the problem, its you”. This is one of the best quotes I have read regarding credit cards. It takes a lot of discipline not to rack up credit card debt. If you have already ran up huge debt problems with them why tempt fate. I always remember this quote “fool me once shame on you, fool me twice shame on me”. Believe me the credit card debt can come right back and get you again.
Dave
By
Dave Jones, CPA (Who am I?) on Sep 11, 2008
“Set a monthly limit to charges and stick to it.”
Great advice. Especially useful if you NEED to use a credit card to help rebuild your credit.
By
Carla (Who am I?) on Sep 11, 2008
Nice tips here Sam. I just came over to check out your blog since you have emailed me…like what I see so far.
By
lulugal11 (Who am I?) on Sep 11, 2008
Luckily - I use credit cards for convenience, and always pay them off in time (except for when I forget occasionally). Cheers!
By
Robin (Who am I?) on Sep 12, 2008
Point number 6 is SO important. Too often people get carried away and then can’t understand why they don’t have enough money to cover all of their bills.
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Barbara Swafford (Who am I?) on Sep 14, 2008