Credit cards are extremely convenient to use. Most credit cardholders have to stop themselves from going into bouts of emotional spending, or impulse buys – especially when card-based discounts come into play.
That doesn’t mean that you should avoid credit cards. It means being able to manage your use so that you don’t drive yourself deep in debt.
The best advice that Josh Frank – senior researcher at the Center for Responsible Lending – can give is: “Take advantage of the perks, and avoid the penalties.”
So how exactly can you use your credit card without going into debt?
1. Don’t keep a balance, or miss payments
If you’ve got a balance on your credit card each time the statement rolls in, that’s instant debt. Remember that the balance on your card also acquires interest and late fees when they aren’t paid on time.
Missing payments open you up to higher fees to pay and being unable to use your card. It also means that your credit rating is perceived in a negative light, making it difficult to get loans.
Say you’ve got a 3.5% interest rate on your credit card, and a recent purchase worth Php 10,000. If the minimum payment a month is around Php 500, that leaves a Php 9,500 balance with an additional 3.5% added to it every month that it goes unpaid. If you only pay the minimum, you’ll end up paying a lot more in interest, and you’ll find it hard to get out of debt.
Here are the best ways to pay off your bill so that you end up with little or no credit card debt:
- Pay your bill in full and on time
- If you can’t pay in full, pay as much as you can before the due date
- Always be mindful of the due date
- Keep your statements archived (so you can track your purchases and make sure there are no fraudulent transactions)
2. Set a personal maximum balance (that’s below the actual maximum)
Credit card providers assign a maximum credit limit when your card is approved. If you aren’t careful with the way you use your card, it’ll be easy for you to max it out.
Whatever the maximum balance is on the card is, set your own maximum balance every month. Let’s say that your credit card carries a maximum limit of Php 60,000 – set your personal monthly charge limit at an amount you feel that you can easily pay off on time, and don’t go over it.
Now that credit scores may become a thing in the country, here’s one other reason to stay well below your limit: standard credit scores use credit utilization as a major metric. This is the ratio of credit outstanding to maximum credit available on your card. The lower this is, the better.
3. Remember your credit card is not an extension
Your credit card is not an extension of your paycheck or an emergency fund. Given the rising cost of living, the only real way to ensure that you aren’t driven into debt is to either lower expenses or build a better budget.
Credit cards do neither, and using them this way may hit your credit score in worse ways, and you’ll find yourself in hot water later on. So if you don’t have one already, build an emergency fund now, so you don’t go into debt if the worst happens.
Credit cards are a convenient way to take care of expenses. There are plenty of reasons to use a credit card, too: automatic billing, cashless transactions, rewards programs, and others.
But remember that a credit card is a way of borrowing against future income, and not an income source in itself. It’s not free money.
Credit cards are best enjoyed with a firm sense of discipline. But once you have that down, and follow the steps above, you can take advantage of credit card perks while keeping your budget in line.