Using Your Credit in a Responsible Manner
Consumers have a love-hate relationship with credit cards.
On the one hand, they’re a key cause of debt.
Many people fall into the debt traps that credit cards put down.
However, it’s easily argued that the reason credit card debt exists is that most consumers don’t use credit cards responsibly.
When used correctly, a credit card is a powerful tool.
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It offers protection on some of your purchases, you can gain impressive rewards, and it is one of the best things to build your credit score.
Sadly, it’s very easy to use a credit card irresponsibly.
This leads to extensive spending, minimum payments on bills, and massive amounts of interest added on.
To avoid all of this, here are some tips on using credit cards properly:
Set a reasonable credit limit
When you apply for a credit card, the credit card company will run a credit check.
This doesn’t take long, and it determines whether or not you can have the card.
The interest rate on the card depends on your credit score, but so does the credit limit.
Your credit limit is the maximum amount of money you can spend on your card.
The higher your credit score, the larger your limit can be.
This may sound good, but it presents an issue.
Credit card companies may offer a massive credit limit.
You accept this because it looks appealing.
The problem is that it’s so easy to keep spending because you have such a high limit, and you almost go blind with power.
This often leads to maxing out your credit card, and you get a substantial monthly bill.
In turn, you struggle to pay the bill every month.
Avoid this by setting a reasonable credit limit.
Think about how much you can afford to pay each month.
A lower limit is easier for you to manage, so you won’t miss payments and end up in debt.
Pay the full bill
The most common credit card error is to make minimum payments on your monthly bill.
When your bill arrives in the mail, it usually has two figures.
One is the total bill, and the other is the minimum amount you have to pay.
Minimum payments are a debt trap, plain and simple.
Paying the minimum keeps creditors happy, and they won’t signal a missed payment or charge you a fee.
However, it also means interest gets added to your next monthly payment.
The rest of this month’s bill has interest added, and you now have to pay that plus next months.
You can already see how you end up in an endless cycle of making minimum payments and gaining mass amounts of debt.
The solution is simple: pay the full balance every single month.
If you do this, you can use a credit card without incurring any interest rate charges.
You’ll save an incredible amount of money and avoid debt.
Don’t miss any payments
Missing payments is an issue.
This typically means you get a late fee added to your bill, plus interest until the payment is made.
Again, this can quickly lead you down a slippery slope to credit card debt.
Nowadays, there’s no excuse to miss payments.
Credit card companies give you the option to set up a direct debit that pays your full balance every month.
All you need to do is ensure you have enough money in your bank account to pay the balance.
If you set a reasonable credit limit and don’t spend like crazy, this should be easy for you to achieve.
Keep track of your payments
It’s almost too easy to spend a lot of money on your credit card.
When you don’t see money leaving your bank account, you trick yourself into thinking you’re not spending much.
Then, your bill arrives, and you spent thousands of dollars last month.
Overspending leads to debt, which leads to all sorts of financial issues.
Curb your spending to prevent this!
The easiest solution is to track your payments.
Make a physical note of every purchase you complete using your credit card.
Write them down in a book, and keep track of everything.
This helps you see how much you’re spending.
It’s far easier to hold back when you notice how much money you’re parting with.
This is also a handy idea to help you prepare for your credit card bills.
Add up your expenses to be sure you have enough money to pay the bill in full.
Never max out your credit card
Earlier on, we spoke about credit limits.
The previous point was about ensuring you didn’t have an exceptionally high limit as it tempts overspending.
Well, it’s also a good idea to avoid having a ridiculously low limit.
If your limit is just $100, then you can quickly max your card out.
There needs to be a middle-ground that’s not overly high and not low enough for you to max it out.
Why is this important? Maxing out your credit card is bad news.
In fact, you should never max out your credit card as it can harm your credit score.
The closer you get to your limit, the more your score will be impacted.
This is because it shows you are borrowing too much money.
If you max out your card, your score will take a significant hit.
As a result, this prevents you from applying for other forms of credit.
It may also tweak the terms on your card and lead to interest rate increases.
So, always be mindful of your credit limit and stay clear of it.
Overall, the worst way to use a credit card is to rely on it for everything.
Think of your card as a financial tool.
Use it now and then to build credit, but avoid using it as a debit card.
Reserve it for important purchases that will benefit from credit protection.
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We can be of service if you’re in a lot of debt due to misusing your credit card.
We offer credit counseling and debt-relief services across Canada.
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