Credit card debt can drag you down into a pit of inescapable fees, high interest rates (over 30% interest rates are common) and high minimum monthly payments that do little or nothing to reduce the amount you owe. Avoiding credit card debt is vital to help you stay within your budget and dodge the shoals of bankruptcy, but avoiding keeping a credit card entirely can put you in a different kind of financial danger.
Most of your credit score is based upon making timely and appropriate payments of your debts. In other words, unless you have some kind of debt (credit card, student loan, car loan, mortgage, and so on) your credit score will remain low because of lack of information. Having a low credit score can mean you have to pay more when you do take out loans. It may also hurt your chances of getting car or housing loans, and, because some employers now run credit checks as part of the hiring process, could even hurt your career.
So, keeping a high balance on your credit cards is a quick road to financial ruin, but keeping and using a credit card is necessary to help build up a good credit score. How can you maintain a credit card without getting into trouble? Try these tips!
Pretend It’s a Debit Card
Record your credit card purchases when you’re reconciling your checkbook so that you don’t mistakenly assume that money earmarked to pay off your credit card is free to use for other purposes. If you’re careful with your credit card, you can use it as freely as a debit card, and transfer the money from your bank account to pay it off when the bill comes due.
If you have a credit card that offers bonuses for using it, this might even be a more rewarding strategy than using your debit card. You would have spent the money anyway, after all. Using a credit card with rewards, and setting aside the money to pay it back, avoids the high interest fees that will eat up any rewards benefits and puts you ahead of the game.
Never Just Pay the Minimum
Minimum payments are calculated to leave you paying and paying on the credit-card loan forever. Occasionally, unexpected expenses may require you to charge something on your card that will take more than one month to pay off. Maybe your cat gets sick, or your car needs repair: in these cases, a credit card is vital, but you’re going to carry a balance. What you should do is pay as much towards the loan as you can afford each month. Because credit card interest fees are so high, you’re costing yourself a significant fraction of money for every penny that remains on the balance over to the next month. Make sure that there’s as little left as you can afford.
If you’re keeping a credit card to improve your credit score, the information that’ll be recorded is whether you make your payments promptly and how much debt you’re carrying. Less debt carried over month to month makes for a better score (by and large – the formulas used are complicated, and differ between companies) and more payments made on time also improve your score. In other words, the two most important things you should do with your card are use it every month and pay the bill in full every month. Having a credit card that isn’t used simply means that you’re not making any payments, so even if it won’t hurt your score (no late payments, no unpaid balance) it’s also not going to help it. You may as well cut it up at that point and avoid the temptation!