How to Manage Your Credit Card Responsibly

Someone on a laptop using a Citadel Credit Card

There’s no denying that credit cards are a convenient feature in our lives. No longer do we have to carry large amounts of cash around with us to make bigger purchases; all we have to do is swipe our cards. The risk of theft is also lower than with large wads of cash in your pocket, and many cards even offer cash rewards and other incentives.

But there is a flipside to this added convenience and safety. When we don’t have to physically take out cash to pay for our purchases, we can become more impulsive in our spending decisions. According to recent reporting by the Federal Reserve Bank of New York, credit card debt increased by $45 billion in the first quarter of 2023, putting collective credit card holder debt over $1 trillion for the first time.

Consider this: The statistical average credit card debt is $5,733 per cardholder, but there are cardholder's that pay their statement in full and carry no debt. The remaining cardholders balances are far higher than the statistical average. With many interest rates at 20% and up, making the minimum monthly payment can result in thousands of dollars in interest.

Credit cards are a wonderful tool if used responsibly, but can be a detriment to your financial health if not managed carefully.

Understand How Interest Rates are Charged

Credit cards are one of the highest-interest financial products out there. With the Federal Reserve on an interest raising kick, credit card rates soared to over 27% in February 2024. (Keep in mind that the annual percentage rates (APR) you pay on your cards may vary widely based on factors such as credit score and debt-to-income ratio). This interest rate is charged on whatever balance you keep on your credit card, which is why many financial experts recommend paying off your credit cards in full at the end of each month.

Don’t Fall for the ‘Minimum Payments’ Trap

Of course, due to variable financial circumstances, it might not always be possible to pay off your credit card in full every month. Even if this is the case, though, you should still avoid falling for the ‘minimum payments’ trap, no matter how enticing it is compared to the monthly balance.

Remember the power of compound interest: it can work against you just as well as it can work for you, and with interest rates at 27%, it’s best to avoid keeping anything but a minimum balance on your credit card unless absolutely necessary.

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Track Your Spending and Plan for Large Purchases

One of the worst habits you can develop is to indiscriminately spend with your credit card, and then simply pay your minimum amount each month without knowing exactly what you’ve spent. The smart way is to keep a close record of your spending, regardless of whether you’re using cash or card, and to plan for large purchases well in advance. By setting aside funds for big purchases before you actually spend the money, you can avoid having to keep a large negative balance on your credit card and also reduce impulsive spending.

Set Reasonable Credit Limits

While building up your financial discipline will serve you in all areas of your financial life, research has shown that maintaining willpower is a struggle for most of us. If you have to consciously force yourself to limit your credit card spending, odds are that you will slip at least once in a while. A better option might be to simply lower your credit limit. While this would not stop you from using your card for day-to-day purchases, it will help to make sure you don’t blow your budget on big-ticket items. A low limit will also force you to keep better track of how you’re using your card, since you won’t be able to keep spending for long periods without ever checking on your balance. With a high credit limit, the risk exists to just keep spending until you’ve landed yourself in trouble.

Use Credit Cards to Build Your Credit Score

Responsible use of credit cards can benefit your credit score. Keeping your credit card accounts open but managing them responsibly will have a positive effect on three major components of your credit score: payment history, amounts owed, and length of credit history, which together comprise as much as 80% of your credit score calculation. Building up a good credit score will in turn make it easier for you to access other banking solutions, such as home loans, in the future.

If you would like further assistance in learning how to manage your credit cards responsibly, we at Citadel are here to help. Come to your nearest branch or schedule an appointment to speak with our experts today.

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