How to Avoid Credit Card Debt
Learn how to avoid becoming part of the ever-growing debt statistic in America
Many adults, and even teenagers, have credit cards in their wallets. Swiping is easier than counting cash to pay, and it's more convenient since you can shop online.
Plus, you can charge a certain amount of money and not have to pay the full amount back right away.
Sounds great, right?
Unfortunately, this is the trap that many people with credit card debt fall into. They don't use their cards right, and then they end up worried about how they're going to pay off the huge balance that has grown.
If you want to avoid credit card debt, or want to avoid going back into it, the following steps will show you how to use plastic responsibly.
Pay Off Your Balance in Full... Every Month
You might have heard that leaving a little balance on your credit card helps increase your credit. Well, that's a myth. You shouldn't leave a balance on your credit cards if you have the money to pay them off.
Why? Because if you do leave a balance (which usually happens if you only pay the minimum), then you'll be charged interest. Credit cards have an average of 15% APR, which means you'll be paying more for your purchases in the end. It's better to just pay off the entire balance before or on your due date.
In fact, if you can, you might want to consider making multiple payments throughout the month, like once a week. There are even people out there who make a payment on their card after every purchase they make.
If you do this, just make sure there's no penalty for making more than X amount of payments on your card per month.
What if you have rewards cards and are trying to earn points? It's the same deal. You don't need to leave a balance on your card for your points to go through. They are typically posted on the next payment cycle.
Set Up Reminders for Payments (or Autopay)
One of the worst ways to end up in credit card debt is to simply forget that you owe something.
Maybe you don't look at your credit card statements often, or log into your online account. That needs to change (especially because that also leaves you vulnerable to fraud).
There are a few ways to make sure you're not late on making a payment (which also has negative consequences). The first is to opt into automatic payments, which you can do online or by calling the number on the back of your card.
When changing your settings online, look for a "payments" tab that should have something close to "manage payments" or "autopayments" underneath it.
With automatic payments, you usually have a few choices. You can:
- Make the minimum payment required
- Pay off your balance in full
- Pay the current statement balance
The last two options may be different amounts, depending on when your last payment posted, and if you made any purchases close to your due date.
While this is a great idea for those who have buffers in their checking accounts, it's not so great for those who have fluctuating bank balances. You don't want to opt into full automatic payments, and then accidentally overdraw your account because you forgot your payment was going through.
There are a few good alternatives if this is the case for you.
First, you can set your own reminders in a calendar app on your phone. Second, you can choose to receive emails from your credit card company when certain events happen, such as when a payment is due in X number of days. These email notifications are usually found in your account settings.
If reminders don't work for you at all, and you don't tend to charge a lot to your accounts, then think about at least choosing to make the minimum payment so you're safe.
One last tip—most of the time, you can change your credit card due date, which might make things easier for you if you get paid irregularly.
Treat Your Credit Card Like Your Debit Card
Contrary to popular belief, credit cards don't equal free money. You should never buy something that you can't afford with cash.
An easier way of looking at this is treating your credit card like your debit card. You wouldn't buy something for $500 if you didn't have that $500 in your bank account, right? Otherwise, you'd face an overdraft fee.
The point is, you should never charge more than you can afford to pay at the time of purchase. So if you have a balance of $1,000 in your bank, you shouldn't be purchasing something that costs $1,100.
Stick to Your Budget
Whether you have a "formal" line-item budget, or follow the 80/20 budget, try and stick to it as much as possible. Debt is usually a result of impulse purchases, so if you stay on the path you set for yourself each month, you shouldn't be spending more than you earn.
That leads us to...
Differentiate Between Needs and Wants
Do you struggle with saying "no" to things you want to buy, budget or no budget? Then it might be useful to get clear on what's a need and what's a want.
If you have to, go back to basics and only charge what you need to buy, such as groceries, gas, insurance, utilities, etc. Use cash for the rest of your expenses so you're not tempted to swipe every time you see something you can't resist.
Don't Get a Rewards Card Unless You're Disciplined
Rewards cards are different beasts, and it's even more important to use them correctly, otherwise you lose out.
These types of credit cards are only for those who are extremely disciplined in their use of credit because it's very easy to get caught up in charging purchases just to earn points.
You might have even seen some commercials that encourage this. They show a person paying for someone else because that means "extra points." That's not the right way to use any credit card, and it's the wrong mindset to be in. Remember, you should only charge what you can afford.
The best way you can use a rewards card (and get the signup bonus) is for planned purchases. Perhaps you're remodeling your house, buying new furniture, getting work done on your car, or are paying for hefty insurance premiums all at once. These are things you've already budgeted for, and will allow you to meet the spending requirement to get bonus sign up points.
Again, be very careful when using rewards cards, as they tend to have higher APRs than regular credit cards. If you don't pay off your balance in full, you'll be charged more in interest, and that negates the rewards or cash back you've earned.
Additionally, make sure you're smart about which rewards cards you sign up for. Some are strictly cash back cards, which means you can redeem your points for cash or statement credits. Others are travel rewards cards, and you can redeem your points for airfare or hotel stays.
Don't Use Your Card at All
Of course, the easiest solution to avoid credit card debt is to avoid using your card at all costs... at least until you get your spending under control.
Some people freeze their credit cards in a block of ice so they can use them once they feel more confident, while others might cut up their card and ban themselves from using credit for a long time.
It's up to you to know your limits and choose accordingly.
It's Not Difficult to Avoid Credit Card Debt
As long as you're aware of your spending habits, follow your budget, and check in to see how much of a balance you have on your card, you should be able to avoid credit card debt without much effort. It's only when you start charging everything and anything without any regard to what you have in the bank that you're at risk. Follow the steps above and enjoy less stress around credit card payments.