Credit cards are everywhere these days. Ever since I graduated from college and entered the “real world,” I have been barraged by an incessant flood of credit card offers. Nothing screams adulthood like 2% cash back and 0% APR for the first year, amirite?
Credit cards cause a lot of problems for a lot of people. According to Statista, there are about 424 million credit card accounts in the U.S. with a total of $730 billion in credit card debt. This means that the average credit card in the U.S. has a balance of $1,720. The average credit card debt for people under 35 years old is $5,808. If you happen to have credit card debt, getting that balance to $0 could be the first major step on your path to financial independence.
Credit cards don’t have to be all bad, though. Whether you’re thinking about getting your first credit card or already have one (or a few), here are three simple steps and things to know to approach credit cards in a responsible fashion — to make your credit cards work for you, and not the other way around.
Step 1: Treat your credit card like a debit card
With a debit card, a bank often will immediately penalize you if you spend more money with your debit card than is in your checking account. In other words, if you overdraw your bank account (e.g. spend more than you actually have saved) you face a penalty.
The same should be true for your credit card. Simply put, don’t spend more than you can afford to pay off every month.
The average interest rate for credit card debt is about 15%, which is at least two or three times higher than typical student loan interest rates. This is what makes credit card debt especially deadly and well worth taking the time to eliminate and avoid altogether in your life.
Instead of loading up a credit card with huge purchases that you can’t pay off within a month, treat the credit card the same way you treat a debit card. Only spend what you can afford to pay off each month. Track your expenses carefully and set a spending limit. There are a host of websites and apps that allow you to track your credit card spending every month; Mint and Prosper Daily are a couple of popular options for tracking all things money (including credit cards).
Step 2: Seriously, don’t carry a balance
A survey from BMO Harris Bank found that nearly 40% of millennials believe that carrying a balance on their credit card will improve their credit score. This is a huge misconception. Carrying a balance on your credit card does not help your credit score; it actually will lower your credit score in many cases.
Put simply, pay off your credit card in full every month, or make it your financial goal if it isn’t immediately attainable. You can set up automatic payments, enabling you to automatically pay off your credit card in full every month. This way you don’t have to worry about missing a payment deadline or racking up interest expenses.
Carrying a balance on a credit card is very expensive to you and is more likely than not to be detrimental to your credit score in the process. So, seriously, don’t carry a balance on your credit card. Make paying off your credit card in full, on time, and every month a financial priority.
Step 3: Take advantage of the points and rewards
One benefit to being swamped with credit card offers is the increasingly attractive rewards and points offered by cards, which can provide some nice perks just for using a credit card for everyday purchases. Some cards provide cash back, meaning you essentially get 1% or 2% off every purchase that you make. Other cards will provide extra rewards for when you do certain things like buy gas, eat at restaurants, or travel.
In most cases, it makes sense to start with a credit card that doesn’t charge an annual fee. While there are some cards that do have rewards that could justify an annual fee, most of the time you’re going to be better off finding a simple card with cash-back rewards and no annual fee. This will help you save a few extra bucks each month (if you remember steps 1 and 2) without having to change your behavior whatsoever.
Keep it Simple
There are plenty more tips and hacks to use credit cards to your advantage, but starting with these three simple steps will set you on the path of responsible and productive credit card usage. Here at The Vantage, we’re all about starting with the basics and keeping it simple.
If you avoid credit card debt (or pay it down ASAP if you have some), pay your balance on time every month, and utilize the free perks that come with credit cards, you will be well on your way to maximizing the positive attributes that can come with credit cards.
Originally published on The Vantage
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