How to use credit without abusing it and causing debt problems.
Credit cards are not the enemy of a healthy financial outlook. You can use credit effectively without putting your financial stability at risk. But like so many things in life, a credit habit becomes detrimental when it’s abused. When you overuse credit, charge without thinking or use your cards knowing you can’t afford to pay back the debt then yes, credit cards have the potential to cause problems in your life.
However, credit counseling is like rehab for people who have faced challenges with credit card debt in the past. And like many rehabilitation programs, you can go back to using credit responsibly once you’ve recovered by eliminating the debt that was holding you back. You learn to avoid triggers for things like impulse purchases and get coaching on how to live within a budget so you don’t overspend.
Of course, if you have an all-out credit card spending addiction, then you may need to cut out credit usage in your life completely. However, for most people, it’s about getting out of a bad situation and learning better habits to use moving forward.
Credit cards are a great financial tool when used correctly. But you have to be a Smart Spender when it comes to using credit the right way.
Smart Spenders aren’t going out to get credit just because they can. And they don’t treat credit like money that they don’t have to pay back. They understand that credit cards can be used for convenience, safety and tracking, but even credit cards used for the right reasons have to be used responsibly.
Smart Spenders aren’t constantly going out and signing up for new credit cards. Instead they only get new credit when they need it and shop around for the best cards for their needs. Instead of being lured in by advertising, they research credit cards carefully to ensure they’re not blindsided once the card is in use or that the rewards aren’t worth the interest and fees.
Smart Spenders aren’t using luck or crossing their fingers hoping that they get approved because they know exactly how creditors judge creditworthiness. They understand the three Cs – character, capital and capacity. They know they have to show they’re a responsible borrower who can and will repay what they borrow, with assets to back them up.
Once Smart Spenders find the right card for their needs, they take time to read through the contract carefully so they know what they’re really getting into. They know their credit limits, can strategically pay around the grace period, and know how to avoid penalties – and exactly what those penalties will be if the card is misused.
Even though credit card statements always come with a minimum payment requirement, Smart Spenders always pay more than the minimum – it’s a trap. They usually pay off everything in full on credit cards used that month. This way they always start the month with zero balances on their cards. When they can’t pay off a balance in full, they make a plan to pay it off as fast as possible, and know how to read statements to find balance payoff information.
A credit card grace period is the amount of time you have to pay off a balance before interest charges are applied. A Smart Spender knows when the grace period ends in relation to each billing cycle so they can pay off the debt accrued that month before the interest charges are applied to minimize the cost of using credit.
Smart Spenders understand that just because a credit card company gives you a high credit limit, it doesn’t mean you should run up that debt. Smart Spenders check two metrics often: how much they can afford to borrow and what they can comfortably pay to eliminate debt each month. They check how much they can borrow by setting a limit at 15% of their net annual income. And they also check how much they can afford to pay back each month by calculating 10% of their net monthly income. This helps ensure Smart Spenders have enough money for bills, expenses like groceries, and even savings.
One of the biggest downsides to using credit is it makes it really easy to give into impulse buys when you see something you want in a store. Smart Spenders resist the temptation and only buy things when they need them after taking time to shop around for the best price. They may even think about it a few days before deciding to buy something to make sure they really have to have it. They also avoid other bad habits, like using credit to cover budget gaps, leaving balances to accrue interest month after month and using one credit card to pay another.
Now you know these eight credit habits to make you a Smart Spender, too!
Recognizing the warning signs of a bad credit habit
Could you live without charging for 30 days? Think about that – no charging things that catch your eye in a store, no charging for those unexpected expenses or emergencies that always seem to pop up every month. Not charging whatsoever.
If you, your budget and your finances couldn’t handle going without credit for just one month, then you may be developing a bad credit habit that needs to be broken. Dependence on credit is dangerous because it’s often a sign that you’re not living within your means. If you need to use credit cards just to get by every month then that’s definitely an issue.
However, even if you have a budget and pay for regular expenses with your regular income, if you can’t afford to cover for unexpected expenses and emergencies with money in your savings, then you aren’t fully financially stable.
In this case, you need to get your finances to a place where you can save for emergencies and cover all of the expenses in your budget without relying on credit. If you can’t do that because your credit card bills are eating up income, it’s time to look into options for debt relief. This will allow you to lower your debt payments so you can start to save, while crafting a strategy that allows you to eliminate your debt in full as quickly as possible.