How to Stay Out of Trouble with Credit Cards
Updated: Jul 29, 2019
Credit cards can be very dangerous if you let them get out of hand, and that’s what credit card companies are hoping will happen. If you miss payments, they make tons of extra money charging you late fees and interest. But if you stay organized and responsible, you can really benefit from using a credit card instead of your debit card or cash!
Chances are, most people who have had a credit card have made a mistake somewhere. They’ve been a few days late on a payment or they’ve put a little too much on a card and were only able to pay part of it off at the end of the month, causing a large chunk to roll over and start incurring interest. I’m no exception. Thankfully I only had about $1000 on a card that I didn’t pay off in time, and I was able to pay it off in full the next month. However I still had to pay over $50 of interest as well as deal with a lot of stress that came with knowing I couldn’t pay off the card on the date it was due. Through my experience and seeing other people in my life go through the same thing, I’ve become much more careful about using credit cards, and come up with this list of things you should do if you’re starting out with a credit card for the first time.
Pay early, pay often
It may not occur to some people, but you can actually pay off your credit card whenever you want. You don’t have to wait for it to reach a certain amount or a certain date so why not pay it once a week instead of once a month? This makes it easier to keep track of what you have in your bank account and on your card. If you are constantly making payments on it, money is constantly coming out of your bank account so you can see your account balance changing throughout the month and not just a huge drastic change one time.
I like to pay mine off about twice a month. This can be a good way to do it if you get paid every two weeks. When you get your paycheck you automatically take out the money you’ve already spent so that you don’t think you have more money available than you do. It is also a lot easier to keep track of your spending and budget over the course of two weeks instead of an entire month!
Something else to keep in mind is that even if you don’t want to pay more than once a month, you can still pay it early. There is usually some time between the date the statement closes and the date the balance is due. Instead of waiting until the date the balance is due, set calendar events and reminders for yourself the day after the statement closes and pay it immediately. If you overspent that month, it’s too late to change that, but it gives you a little more flex time if you realize you don’t have enough to cover the full amount and need to find a way to make a little more money in the next week or two.
Credit card companies are hoping that you make mistakes and let your cards get out of hand... If you follow these tips and stay organized you can really benefit from using them!
Pay it off (no matter what)
If you pay on time, the only way to get charged for using a credit card is to not pay it all off every month. You should not be using a credit card like a loan, it should be used like your debit card. If you pay early and often, you aren’t as likely to have an issue with this one, but if you aren’t careful and organized you can still get yourself into trouble.
If you get to the end of the month and can’t pay it all off, first you pay as much as you can. Dig into your savings (while I personally wouldn’t recommend draining it, some people would say do it if you have to) and make sure that the amount that rolls over is as little as possible. If you have $1000 on a card and $700 in your checking account, pay off the card with all $700 so you only incur interest on $300 instead of the full $1000. Because the interest is a percentage, the lower you can make the amount that rolls over, the lower the amount of interest you will have to pay.
If you find yourself in this situation, do what you can to make more money and reduce your costs for the next month. Cancel subscriptions that aren’t absolutely necessary, (who knows, maybe you can even go a few months without them and save some more!) start selling some clothes, extra furniture, or art that you’ve made, and cut back on all unnecessary purchases (alcohol, Starbucks, fast food, new clothes, restaurants, etc). The amount and intensity of the changes you need to make depend on the amount you need to pay off (if you have $50 roll over you probably don’t need to start selling all of your furniture).
Once you get it paid off, look back at how you ended up spending too much and adjust in other areas to keep it from happening more than once.
Pay it all
When it comes time to pay your card, you will typically have three choices: pay the minimum payment (you should never do this!!), pay the statement balance (the usual choice), or pay the card balance. If you can, pay the card balance. The statement balance is the amount up to a certain date where your monthly bill stops and a new one starts. If you have the funds available at the time, go ahead and pay off anything that you’ve charged on the new statement since the last one closed. (For example, your statement balance might be $500 from April 4th- May 4th . But if it’s May 7th when you’re ready to pay your card off and you’ve spent another $50 since the 4th, pay all $550 if you can!) This is an easy way to pay down part of your current statement balance without having to pay multiple times a month. You still make one payment, but you pay twice on every statement (once when the previous statement is due and then again when the current statement is actually due).
Get the mobile app
If you aren’t doing mobile banking, you should be!! Not only can you opt for paperless statements (credit cards and travel points won’t matter when the world ends from global warming!!) but you can check your account and card balances in about two seconds on any day at any time. This has been great for me because it makes me so much more informed about my finances. Bored at work? Check your bank account. Waiting in line at the drive through? Check your bank account. Waiting for your bagel to pop out of the toaster? Check your bank account. It doesn’t have to be as obsessive as I sometimes make it (whoops?) but checking in on your purchases and spending once a day or a few times a week makes you much more conscious of your financial situation. The first step to success is being well informed.
Banking apps also make things so much quicker! Just using my phone, I can deposit my own checks, set up auto-pay for recurring bills like a car or rent, make payments on credit cards, and send other people money. If I pay for dinner, in thirty seconds my friend can get her total and send me her share. (I know apps like Venmo work this way too, but not everyone uses the same apps or uses them at all, so transferring directly from one checking account to another can simplify the process) You can also lock and unlock your card, report and replace a lost card, and do a bunch of other cool stuff just from a few clicks of your phone.
Don’t close it
Just because you have spent what you needed to spend to get the sign up bonus on a card, or your cards are getting too confusing because you have several, that doesn’t automatically mean that you should close and get rid of them. Closing credit cards can actually do more damage to your credit score than opening new ones. Unless a card has a crazy high annual fee, just pay it all off, and put it in your safe or safety deposit box.
This will help your credit in multiple ways. First, your credit utilization is part of your credit score. If you have $4,000 on one card (with a limit of $5,000) your credit utilization is crazy high (80% for those of you who were trying to do that in your head). But if you have another card with a $5,000 limit and one with $10,000 sitting at home unused, your credit utilization is only 20% (your total available credit is $20,000, but your only using $4000, or 1/5th). Huge difference! (And another reason to keep your cards payed off as often as you can so that your utilization always stays low.)
Another aspect of your credit score is account history. If you have 3 cards that were only open for 6 months or less, banks are gonna get mad and your credit score will take a hit. If it becomes clear that you’re only opening cards to get the sign up bonus, then closing them and never using them again, banks won’t want to approve you for others because they know that they can’t make money off of you. If you keep those cards in your safe, make a random purchase on them from time to time, and close them after 1 year, 3 years, or 5 years the account history you have will look much better!