How to Manage Your Credit Card Responsibly
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 research, the average American household has $5,700 in credit card debt. If you exclude people who pay their credit card debt in full every month, however, this number jumps to $9,333. The average household in Pennsylvania has credit card debt of $6,065.
Credit cards are a wonderful tool if used responsibly, but can be a detriment to your financial health if not managed carefully. Here at Citadel, we always advocate responsible use of our credit cards, so here are a few tips for managing your card.
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 have soared to around 17% per annum. 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 17%, 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 to schedule your free consultation with us today.