A credit card can be a valuable tool if you know how to use it properly. Likewise, using credit cards irresponsibly can lead to a world of hurt. But if you want to use credit in the right way, you don’t have to forsake credit cards altogether, although that’s not a bad strategy if you know you’re prone to abusing them.
Instead, adopt a few simple habits that will let you enjoy the benefits of credit cards, cash flow flexibility and rewards perks, to name two, without the dangerous downsides.
Follow these tips to make credit your best friend (instead of your mortal enemy):
- Pay your bill in full every month.
If you don’t want to end up like the “average American,” you need to stay out of credit card debt altogether. That means charging only what you can afford and paying your bill in full every month or even a few times a month if it helps you stay ahead of it.
Doing so may seem challenging, but this is the number one rule of using credit cards instead of letting them use you; it is truly the only way to avoid getting into credit card debt, and the only way to avoid paying interest on your purchases.
- Never pay your bill late.
In addition to paying your bill in full, you should also make sure you pay your bill on time. Most issuers charge an ugly fee often up to $39 for a late payment. And since 35% of your credit score is based on your payment history, a missed payment can really mess your score.
Meanwhile, paying all of your bills on time is a great way to keep your interest rates low and improve your credit score and your overall credit health over time.
If you’re afraid you’ll forget and wind up missing your due date, set a reminder on your phone a few days beforehand or mark the date on your calendar. Another option: Adjust your online account settings so your bill is paid automatically on a certain day of the month through a direct bank draft.
- Log into your account.
One reason credit is easier than cash to use and keep track of is because it creates a paper trail. When you use credit for all of your purchases, you don’t have to keep receipts for things like grocery and gas purchases. Instead, you can just log in to your online account to see where you spent money, how much you spent, and how much you have left.
Checking in often at least once a week can help you stay on top of your spending so it never spirals beyond your control. If you notice yourself pushing the limits of what you can afford to pay back this month, stop using your card immediately until you get the balance paid down.
Examining your account activity can also help you spot any money leaks in your spending. Are you spending way more at Starbucks than you realized? Most credit cards offer powerful tools on their websites to track your spending use them to your advantage.
- Use your credit card as a compliment to your budget.
If you’re disciplined enough, you can use a credit card as a compliment to your budget. This strategy usually involves creating a written budget, then using your credit card for purchases until you work through your predetermined spending limits. This is a great way to earn rewards for purchases you’d be making anyway, and to gain certain protections that only credit offers.
To stay on track, make sure to log in to your account once per week or every few days. Seeing your spending on your computer screen in black and white is sometimes the only way to let how much you’ve really spent sink in.
- Know your limits.
If you’re worried that you might overspend, ask your credit card company to lower your credit limit to something you know you can manage on a monthly basis. They should be more than happy to oblige since they ultimately want you to pay the money back, and they can often make the credit limit change effective immediately. Not everyone wants a $10,000, $5,000, or even $3,000 limit on their cards, and that’s okay.
- Only use your card for the big stuff.
A lot of people who get into credit card debt complain that it sneaks up on them, and for good reason. Sometimes it’s those little $10 and $20 purchases that, over time, can take on a life of their own when left unchecked. If you want to avoid a “death by a thousand cuts,” consider using your card just for big purchases instead.
The best way to do this is to save up for your purchase in cash first. Then, after you make the big purchase with your rewards credit card (and reap the rewards points), you’ll have the funds to pay it off right away.
- Take advantage of all the rewards you can.
Those who have the most to gain from credit cards are the people who master the art of credit card rewards. The best rewards credit cards offer an array of benefits, including cash-back, hotel loyalty points, and frequent flyer miles that can be earned just for using your card for regular expenses such as groceries or the cable bill.
Of course, credit card rewards become a lot less lucrative when you’re paying interest on your purchases because you’re carrying a balance. To avoid that misstep, only pursue credit card rewards if you know for a fact that you can pay your balance in full. If you don’t know that for sure, those rewards probably won’t be worth it.
- Choose cards with extra perks.
Even if you’re not interested in credit card rewards per se, you can still leverage the benefits of a credit card. For example, some of the best credit cards out there offer perks such as free travel insurance, primary and secondary rental-car coverage, price protection, and extended warranties. If you pay your card in full every month, you can enjoy all of these perks for free.