Credit cards are tricky beasts: On one hand, they’re an essential part of establishing and building personal credit. On the other hand, their convenience and means of instant gratification get consumers into trouble. What’s more, the disproportionate rise in the cost of living compared to income growth means Americans are increasingly turning to credit cards to fill the gap.
Despite the inherent risks, credit cards are useful tools that can yield bountiful results when managed properly. Consider the following ways to become a debt-free credit card user and clear the path toward better credit and healthier spending habits.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
Adjust your attitude. The first step in becoming a debt-free credit card user is often the most overlooked. In American society, it’s considered normal to take out loans for cars, college and homes, and so it’s natural that many consumers believe credit card debt is just a way of life. In truth, consumer debt is not a lifestyle; it’s a circumstance perpetuated by the misguided belief that financing what we cannot afford is perfectly reasonable.
Instead of treating your credits cards as a lifestyle crutch, use them to build a healthy payment history by only charging expenses you can pay off. The miles and rewards you accrue as a result of your responsible use can go toward offsetting or funding an upcoming vacation or treating yourself in other ways.
Know where your money is going. The ability to pay off credit cards in full each month doesn’t require a six-figure annual income. Instead, it requires a clear understanding of your monthly expenses and the self-discipline to spend less than you earn. Paying your credit card balance based on regular usage and not having to empty your checking account or undermine your other financial goals is an important step in becoming a debt-free credit card user.
If you find you’re relying on your credit card to bridge the gap between your earnings and your expenses, it’s important to seek out additional income sources while identifying ways to reduce your costs. Neither of these tasks is easy or quick, but the efforts you put into them will result in less dependence on credit cards.
[See: 10 Completely Careless Credit Card Mistakes You’re Making.]
Understand that limits are not your budget. Credit cards issue limits on the amount of money cardholders can borrow, based on their payment history, income and other factors. Just because your card has a credit limit of $10,000 doesn’t mean you should charge up to that amount. To become a debt-free credit card user, only charge what you can afford to pay off. Your credit limit is not your budget and shouldn’t be treated as such.
Create an emergency fund. When emergency strikes, many consumers feel they have no choice but to charge the expense to their credit cards. In fact, just 41 percent of consumers who participated in Bankrate’s “Money Pulse” survey in January 2017 said they could rely on savings to cover an unexpected expense of $500. An emergency fund is key to keeping you from reaching for the plastic and paying subsequent interest charges during an emergency.
Consumers have likely heard the common financial advice to have three to six months’ worth of expenses socked away in an emergency fund. However, a family with $4,000 worth of monthly expenses may feel defeated by the prospect of saving three to six times that to feel prepared for an emergency. Although it’s still a good goal to aspire to, even $500 to $1,000 in emergency savings can offer a sense of security not currently felt by the majority of Americans. What’s more, reaching a savings milestone can help motivate consumers to continue building their emergency funds.
Avoid opening multiple cards. Some consumers believe having several sources of credit contributes to a positive credit score. In reality, a history of on-time payments is the important factor and having one or two credit cards is more manageable for most people. If you have multiple credit cards, it becomes more difficult to keep track of balances and due dates and can result in forgotten charges and late payments.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
Make payments early and frequently. Though credit card payments are due once per month, making payments more regularly can give you a firmer grasp on your spending. A few small balances are easier to pay than one large one, especially if you have a variable income. Keeping a closer eye on your credit card spending also helps you identify fraudulent charges and respond more quickly.
Use your rewards. Credit card reward points can help you splurge without the need to adjust your budget. But 31 percent of Americans admit to never using their credit card rewards, according to a Bankrate “Money Pulse” survey conducted in April 2017. Redeeming rewards is one of the perks of having a credit card and also serves as a budgetary boost. You can use rewards to fund an upcoming vacation, purchase a pair of leather boots or simply offset your grocery bill. Rewards are not “free” money in that you had to spend money to accrue them, but failing to redeem them is like leaving money on the table.
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7 Ways to Be a Debt-Free Credit Card User originally appeared on usnews.com