Credit cards can be an important tool in your quest for financial security. You can use your card to spread out major purchases and establish healthy credit. Some credit cards even come with rewards such as cash back on purchases or airline miles. However, the convenience of credit cards can also make it easy to quickly accumulate debt.
Fortunately, there are measures you can take to prevent overspending this holiday season, and spiraling into debt for the New Year. Whether you’re opening your first credit card or starting fresh after paying off a large balance, here are some tips to use credit more wisely.
Spend within your means
The best way to avoid credit card debt is to pay your balance in full each month. But how can you make sure that’s an attainable goal? The answer lies in your spending habits. It’s important to understand that your credit card can be a tool to build credit and pay for larger purchases in small increments – it shouldn’t be a way to buy things you can’t afford. This can be a hard lesson to learn, as it’s easy for credit cards to feel like “free money.” But remembering to only put purchases on your card that you’ll be able to pay off is the simplest way to prevent credit card debt.
Make monthly payments on time
Another way to prevent credit card debt is to make payments on time, every time. Many banks let you set up automatic payments, so money from your chequing account can go directly to your card before it’s due every month. You can also set up personal reminders on your calendar if this isn’t an option. Late payments often result in late fees, which can quickly add to your existing balance and make it harder to keep up with payments. You might also consider making multiple payments a month if it works with your budget.
Keep a low utilisation ratio
Ideally, you want to pay your balance in full each month, but if that’s not possible, at least try to keep a low utilisation ratio. Your utilisation ratio is the per cent of credit currently in use. Let’s say you have a credit line of $5,000. If you have $2,500 in purchases on your card at a given time, you have a 50 per cent utilisation ratio. Using a high percentage of your available credit can make it harder and harder to pay off debt. As you accumulate a higher balance, you’ll end up paying more in interest. As a rule, keep your utilisation ratio below 30 per cent of your available credit to stay on track and prevent accumulating too much debt.
Understand your credit card terms
Knowing the specifics of your credit card agreement can help you avoid unexpected fees and keep track of your payments. Different credit cards will have different interest rates and potential fees. Before you use your card, read through the agreement to understand when you will be charged a fee, how interest will be applied to your account, and when that interest rate will increase. For example, some cards offer zero per cent interest for a specific amount of time, but when that time frame is up, you’ll be charged interest on purchases. Don’t let these factors surprise you or create an unmanageable balance.
