Credit cards are a powerful tool that can help cover various financial expenses, including groceries, wellness payments, education, bills, online purchases, and entertainment. However, if this card is used carelessly, it can accumulate debt, affecting one’s credit scores and ability to take out bigger loans, like financing a home purchase. So, any individual who uses a credit card must use it responsibly and follow good financial practices to avoid debt.
1) Make Timely Payments
It’s easy to use credit cards for multiple online and offline purchases. However, this can accumulate into excessive debt if not paid back on time. So, one of the most practical smart credit card habits is to pay back balances in full each month. Most banking institutions allow users to set up automatic payments to deduct money before it’s due each month. Paying on time can also help avoid late fees that further increase the existing balance. Make multiple monthly repayments whenever the budget permits, as this can help build a good credit history.
2) Never Overspend
Another tip to avoid credit card debt is to stop overspending. For instance, a portion of the paycheck, like $300 monthly, is for credit card payments. If spending exceeds this limit drastically, that’s not a good sign. The credit card is a great tool for building credit scores and gradually paying for larger purchases. Using credit cards for payments may help one earn rewards and get discounts on select items. However, do not use it early on to pay for unaffordable items within the billing cycle. This is because if the bill cannot be paid back on time, it may affect one’s credit history. Interest may also pile on.
3) Manage the Utilization Ratio
Maintaining low balances by managing the utilization ratio is a great step to avoid debt if full balances cannot be paid back each month. The utilization ratio is the percentage of credit in use. For instance, if the available credit line is $5,000, and there are $2,500 in purchases on the card at any time, it reflects a 50 percent utilization ratio. This is considered high utilization by lenders and credit bureaus and can make it tougher to pay off debt. It may even affect credit scores over time. To avoid such consequences, keep the utilization ratio below 30 percent of the available credit.
4) Read All the Credit Card Terms
Each credit card contains terms and conditions that can be unique to the user. Carefully review these guidelines as they include detailed information on the charges associated with each transaction, offline and online. Some cards may charge a monthly fee, while others may waive any fees for utilizing credit beyond a certain limit. The terms and conditions will also help one understand the interest rates charged for each billing cycle. Reading the agreement before signing up for the card can help avoid unexpected fees, keep track of payments, and avoid debt.
5) Keep Accounts to a Minimum
Credit cards often offer attractive terms and features that make signing up look like a wise decision. However, signing up for multiple credit cards can make it harder to manage spending and track payment dates. Moreover, this will negatively impact one’s credit score. It may also result in getting denied for future loans if there are too many enquiries over a few months. Maintaining financial discipline with cards can help users be financially secure and establish good credit scores.
6) Use It as a Budgeting Tool
The next practical tip is to use the credit card as a budgeting tool. Do this only if the balances can be paid off every month. Use the card responsibly and make all purchases with it, then check how much was spent at the end of the month. Doing this allows one to categorize expenses and set spending limits based on income and financial goals. This is a great way to prevent overspending, meet financial goals, and build a good credit score.
7) Use It Only for Needs
A credit card can be used at most places, including restaurants, grocery stores, and even for online gaming purchases. This makes it easy to spend a few dollars each day, assuming it isn’t much. But, even if the daily spend is about $10, it could add up to $300 in the entire month, which is a massive amount for most individuals. This highlights why responsible credit card usage is key to avoiding debt. Use the card in an emergency, like paying off a phone bill or wellness expenses, then repay it the following month before the billing cycle. This will help build a credit score and avoid interest charges.
8) Avoid Cash Advances
Those who struggle to manage monthly payments often resort to cash advances from their credit card. While this may offer relief, the fees and instant charges on the advance can be quite high, which can quickly turn into debt. It is advised to stop using credit cards for advances. Ask close friends and family for a small loan instead, and pay it back on time. Alternatively, speak to the bank about taking out a personal loan with a manageable payment timeline.
