Now that you've chosen a credit card that best suits your spending habits and needs, it's time to start thinking about how you can best manage this little piece of plastic. If left unchecked, you could end up with a mountain of debt that could potentially mar your credit report and affect your future chances of obtaining new credit.
Here are the two most important questions to ask yourself when you use your card:
Can I afford it?
Many people don't follow the basic rule of credit card spending: If you can't afford it, don't buy it. The purpose of credit is to allow you to buy now and pay later, but if you can't afford to pay later, you might be stretching your finances too thinly.
You might be thinking to yourself, there's no way I'd drop $6,000 on the newest smart television, but sometimes it's the small purchases that can overwhelm you at the end of the month. For instance, having dinner out every night can set you back a few hundred a week, and if you're paying on credit, you could be in for a nasty shock when your bill arrives.
This kind of spending is also known as 'bad debt', and when people use a credit card repeatedly for this type of item, it's usually linked to an inability to connect the card with actual debt that will need to be paid off. Using a credit card feels a little like free money and it is easy to lose track of expenditure. Many people are unaware at any given time what their available balance is or how close to the limit they really are until they either get a notice informing them of an over-the-limit fee or a transaction is declined.
It's a good idea to put together a budget of your daily, weekly or monthly expenditure to keep track of how much you really spend and what you spend it on.
You should also stop and consider whether a purchase is absolutely necessary. Later, check the balance of all your accounts, add this up and subtract any overhead - including and especially your credit card debt. Seeing how unbalanced your credits and debits are can provide the jolt you need to stop spending.
Can I pay it off?
Many big spenders may be able to pay off all their credit card bills, but in the real world it's not always as easy. To avoid falling into a debt trap, ensure you pay off the entire balance each month and not just the minimum amount. This will ensure that you don't accrue interest on the balance that could push your debt levels up.
The new changes to credit card regulations now mean that your monthly statement will include information on the length of time required to settle your balance should only minimum repayments be made. For instance, for an average debt of $3,500, making only the minimum repayment (around $65), it would take you around 55 years to pay off the balance and you would accrue over $22,000in interest charges. This works to deter many people from paying only the minimum amount.
Another good deterrent is your credit report - if you default on a payment (more than 60 days overdue), it will be listed on your personal credit report for the next five years even if the amount has been paid off in full.
However, you shouldn't be afraid to use credit as long as you have good restraint and sense to manage your card. A credit card can be a handy source of funds during an emergency and when used conservatively, can actually facilitate a good credit history. If you have been making purchases that you can easily afford and paying them off soon after, this is the best way to utilise credit and build a credit history for yourself.