A credit card is no more and no less than a tool. Although the use of credit cards generates strong opinions, from Dave Ramsey’s infamous admonitions against using them all together to the more relaxed approach that credit cards can be used essentially as a cash substitute, what ultimately matters isn’t whether credit cards are inherently good or bad: What matters is how you use them.
As such, it’s important to know some of the best practices for using a credit card so you don’t fall into debt, or, if you are already managing high-interest credit card debt, how you can avoid stepping deeper and deeper into financial trouble.
Here are four common credit card pitfalls to avoid at all costs.
#1: If you’re likely to abuse them, avoid them
If you have a propensity to overspend, you’re currently working through a debt consolidation plan, or you’ve taken out a debt consolidation loan, it may not be an ideal time to open a credit account. Particularly if you know you are susceptible to running up balances on your cards and frequently overspending, consider whether a credit card is the best option for you: A more feasible alternative may be committing to using cash for any and all large purchases you intend to make.
Also, if you are low on cash flow and are likely to miss your payments or carry a balance that will accrue interest, consider not purchasing anything on credit until you can stabilize your financial situation. It’s far better to delay gratification in favor of the greater goal of securing financial freedom.
#2: Watch your balances
If you carry a balance, interest will accrue. This is how banks profit from offering you the benefit of using their money, on credit, to buy something rather than using your own cash. Some interest rates can be as high as 20 percent or more, so carrying a balance can be dangerous, leading many consumers into a situation where the overall balance increases so much that they simply can’t keep up with it.
In order to avoid this trap, carefully track your scheduled minimum payment due dates and be sure not to miss them. A good practice is to make a monthly habit of simply paying off the balance in full – even if the full amount isn’t necessarily due. This will become a part of your monthly financial routine, so you never have to wonder whether a due date is approaching, whether you’ve missed one, or whether you have enough cash to cover the accruing balance.
#3: Don’t amass more credit cards than you need
The more cards you open, the more annual fees you will accrue. Before you open a new account, keep in mind that credit cards are not meant to be investment opportunities, no matter what credit card companies try to tell you about the great benefits you will reap from using them. A credit card is simply a tool, so be sure to carefully evaluate the benefits and potential drawbacks before you open a new account.
Juggling too many credit cards can lead to financial challenges. It is far more difficult to keep up with payment schedules, balances, and deadlines when you are managing multiple accounts, so consider keeping your credit accounts simple and streamlined.
#4: Don’t put it on your card if you can’t come up with the cash to pay it off
Avoid the temptation to use a credit card as a vehicle to buy things you can’t afford. Credit cards are convenient tools, not an excuse to “buy now, worry about paying it off later.”
A good rule of thumb to avoid falling into credit card debt is to avoid putting something on your card if you don’t have 1) the cash to immediately pay it off, or 2) the anticipated revenue stream, cash flow, or income to quickly pay it off before the payment deadline.
Finding an advisor to help you spend wisely
If you’re a credit card proponent, keep in mind that these pitfalls can land you in a dangerous financial situation. Use your cards as a tool, and if you are concerned you won’t be able to keep up with them, consider closing your accounts altogether. Be sure to seek advice from an experienced financial planner if you need help.