Credit cards may be the most powerful consumer force in the United States economy.
Americans spent $4.5 trillion with credit cards in 2014, an increase of 8.9% in one year — and the trend is expected to keep rising. Credit card debt is also surging, pushing past $924 billion in 2015 and expected to climb over $1 trillion at some point in 2016. That’s a lot of wallop in anybody’s wallet!
If you are applying for your first credit card, or thinking it’s time to get back in the credit card game after stepping out for a while, it makes sense to check out some of the do’s and don’ts before you get in over your head. Responsible use of your credit card will help you build a credit history, and quickly give you a credit score that makes you attractive to mortgage lenders, insurance companies, banks and credit unions and other important members of the financial community.
No matter where you are in your financial life, you can improve by taking note of a few simple tips that make your credit card an ally and not an enemy.
The most important tip might be to start slowly. Take a card with a low spending limit and build your confidence as you demonstrate your ability to pay on time. If you do fall behind, don’t be afraid to contact credit counseling agencies and debt-reduction programs that will help you navigate your way back to financial health.
Pay on Time
The single most important factor in success with a credit card is making payments on time. Paying the full balance every month is the preferred method, but paying something every month is a must. That can be a serious problem for some people, especially those unskilled at money management, forgetful or both.
If you miss payment deadlines because you’re forgetful, try using one or all of these techniques:
- Set up automatic bill payments.
- Set up online reminders so you receive an email or phone alert when bills are near their due dates.
- Write due dates on a calendar.
Missing payments because of a money shortage is a tougher problem to fix. You may be able to take early action such as contacting your creditors or starting a debt management plan. If you’re far behind on payments, you might be a good candidate to consolidate or settle your debts.
Make More Than the Minimum Payment
You should strive to pay more than the minimum requirement on your credit card debts. Consistently making the lowest possible payment will lead to more interest, more time spent in debt and, inevitably, more frustration.
For example, assume you have a balance of $2,000 on your credit card, your interest rate is 18% and your minimum payment is 2% of your balance. That means your minimum payment would start at $40 per month. Even if you never make another purchase using that credit card, it would take you 24 years to pay off the debt in full, during which time you’d pay $4,396.57 in interest.
If you slightly increased your payment to $50 per month, you could be rid of the debt in just five years and pay only $1,077.25 in interest. By increasing your monthly commitment by even this small amount, you’d save more than $3,000 and be debt-free nearly 20 years sooner.
There are two cases when it’s acceptable to make the minimum payment:
- If you are facing atypical and extremely burdensome financial problems, you may decide to make minimum payments for just a few months until you get back on your feet.
- Or, if you are working on paying off other debts. First, you can make the minimum payment on your credit card while putting any extra money toward the other, higher-interest debt.
Using Credit Cards for Budgeting
Maybe the most overlooked use for a credit card is as a tool for creating and sticking to a budget. In fact, that might rank as the #1 reason to have a card in your wallet.
As long as you plan to pay off the balance at the end of every month, using a credit card for all your purchases turns the painful and time-consuming process of budgeting into a tolerable task.
- No receipt? No problem! Tracking expenses is the biggest source of frustration with budgeting. Credit card statements track every purchase date and amount spent. No need to fumble through pockets and purses for pieces of scrunched up paper that might or might not confirm whether you purchased that shirt last week or last month. Monthly credit card statements do that for you.
- Grace periods help manage your cash flow. Most credit cards have an open window — usually 25–30 days — for you to make payments on purchases from the previous month. These are called grace periods. If you overspend on your budget one month, you have time to recover.
- It provides a safety advantage. Some experts suggest “cash only” as a way to stay on budget, but carrying cash everywhere is not only inconvenient, it’s risky. Credit cards afford you a level of safety that carrying cash can’t.
- Online programs do it for you. There are several online budgeting programs that will track your spending, if you tie them in with your credit card. When you make a credit card purchase, the information is received by your online budgeting program and put into a category you set up. The program can tell you at any point in the month where you are overspending, underspending or right on track.
Again, the advantage of budgeting with a credit card is only useful if you plan to pay off the balance every month. If you’re not disciplined enough to do so, consider using an online banking account to make scheduled payments. Just be sure there always is sufficient income to cover expenses.
Credit Card Record Keeping
Credit card record keeping is essential to managing debt, avoiding identity theft and fraud and even helping prove deductions on your taxes are legitimate.
The easiest way to keep records — and manage your debt — is to tie your credit card number into an online accounting program that will not only record purchases, but assign them to a budget category for you. The online programs also email you alerts when there is any unusual activity with your account, which could lead to fraud.
If you don’t trust online services, you have to keep track of all receipts yourself. This is especially important if there is a warranty on the product, or you plan to make the purchase part of a deduction on your taxes. Manufacturers and the IRS require receipts as evidence that you made a purchase.
Some people take the receipts home and enter them on paper or in their computer. Others carry a checkbook-style register and make entries as they make purchases — the same way you would for personal checks. Either method is fine as long as you’re consistent.
However you choose to record your purchases, it will only be successful if you check that information against the statement you receive at the end of each month. Matching receipts against your monthly statements allows you to verify that everything on the list of charges was approved by you and that the amount charged was correct.
It also helps you detect fraudulent activity and possible identity theft with your card, which is an increasing problem for everyone.
It’s important to dispute errors on your statement as soon as you notice any. Most companies allow for disputes 60 days after the bill was sent, but the sooner you advise them there is a problem, the better your chances of getting a satisfactory resolution.
Call the card company to alert them to the problem. In most cases, that will be sufficient. But even if you call, it is best to also send a letter to the company to make sure there is a record of you reporting the mistake.
If you’re a regular credit card user, it’s a good idea to establish a good relationship with your creditors. That way, they’ll be able to help you avoid problems and will be more willing to work with you should problems arise.
You can create a good relationship simply by practicing good borrowing skills. If you establish a habit of paying your bill on time each month and paying more than the minimum requirement, you’ll get on your creditors’ good side.
It’s a good idea to contact them before you see any signs of trouble. You may want to ask for a higher credit limit or a lower interest rate, for example. When your payment history is good, they will be more likely to improve your rates.
If you’ve established a good rapport with creditors, they’ll also be more likely to work with you if you ever hit financial problems. If you find you won’t be able to pay your bill for the month, for example, you can contact your creditor before the payment is due in order to work out a plan. Your creditor may be willing to modify your payment plan to make your payments more manageable.
Counseling and Debt Management Plans
If making consistent and timely credit card payments is a hardship, you may benefit from professional help. Credit counseling and debt management plans can help get you back on track.
Credit counseling can steer you in the right direction after you’ve taken a few wrong turns. An experienced credit counselor can look over your finances and current situation and then help you create a plan to move forward. He or she can help you set up a household budget, savings plan and payment plan for current debts. Your counselor can also gauge if you need more help.
Among your counselor’s suggestions may be to enroll in a debt management plan (DMP). A DMP is best suited for people who can afford their monthly payments but lose track of bills or forget to pay on time. When you enroll in a DMP, you’ll be responsible for just a single payment each month. Rather than paying credit card companies directly, you’ll send money to your credit counselor, who will then disburse the money to your various creditors. This can simplify your monthly bills and may be able to save you money on interest and late fees.
Consolidation and Settlement
Consolidation and settlement are more involved approaches to dealing with too much debt. While they require significant planning and commitment, they can help you out of a tough situation when you have too much credit card debt.
As with a DMP, consolidation reduces your number of monthly payments by rolling all your debts into one payment. Consolidation may also have the benefit of lowering your interest rate and improving your repayment schedule.
Settlement is a good option for individuals who can’t afford the credit card debt they’ve racked up. You can enlist the help of a debt settlement firm or negotiate directly with lenders to have your debt reduced. When completed successfully, you may owe only a fraction of your original debt.
Credit cards can be useful when used properly. They’re convenient and can improve your credit history. However, misusing or overusing the line of credit can have lasting negative consequences. It’s important to use credit cards wisely and seek help when you need it.