There are generally three ways people treat their credit cards:
- Some pay off their entire balance every month.
- Some pay the minimum amount and carry a balance month after month.
- Others ignore the due dates, interest rates, overcharge fees, and late payment fees, which leads to a never-ending cycle of debt.
The third scenario is an authentic situation for most people. These stories are the main reason why those who have never owned a credit card choose not to get one, subsequently hurting their credit score by wanting to not build a credit history.
If you’ve always had a healthy relationship with credit cards, we applaud you, and we highly encourage you to continue doing so. However, if you’re among those who find themselves in scenarios number two or three, we’ve compiled a list of tips to get you started on your way to financial freedom.
1. Learn your limit (and stick to it!)
In the age of social media, we’re overexposed to well-curated Instagram feeds that showcase the “happy” lives of those who seem to be always traveling and shopping. The constant barrage of such images can easily influence you to overspend. When this mindset is combined with a pretty good credit limit, the results can be disastrous. And once started, it can be pretty hard to get out of this cycle.
Just because a credit card company offers you a generous credit limit, doesn’t mean that you should stick to that bank-determined limit. Remember that credit card companies want you to overspend and pay on interest and other fees; this is how they profit from credit card holders. So, a good rule of thumb is to figure out your personal credit card limit. Meaning, you have to consider all your other monthly financial obligations, and, ideally, your monthly credit card bill should fit nicely into that budget.
Sticking to your pre-determined credit limit in spite of landing that promotion you’ve been eyeing for so long, is probably a good move. Also, credit card companies offer credit limit increases from time to time. Don’t feel pressured into accepting that limit increase. What’s important is knowing that you can confidently pay off your entire monthly balance. Draw the line now before you even cross it.
2. Build your emergency fund
Most people treat their credit cards as their emergency fund, which is a bad habit. While we know that there are times a credit card comes in handy, more often than not, treating your credit card as your emergency bail-out ticket can invite financial trouble. It is because of this that your parents advise you to start working on building your actual emergency fund as soon as possible. Ideally, you should prepare an emergency fund that will see you through six months of living expenses with no income. So, when your car breaks down, or you lose your job, you’re already covered for these sudden expenses without putting yourself in debt.
3. Check your accounts frequently
Make sure to keep track of valuable information such as your credit card bill due date, the interest rate, and whether or not you will be charged for exceeding the credit limit. Being aware of this information helps keep your finances in check. It’s easy to forget a due date especially when you’re having too much fun on a well-deserved vacation, and credit card companies don’t care if you’re dealing with an emergency.
Also, if you use your credit card for daily expenses, checking your accounts two to three times a week is the best way to keep track of your costs as well as hold yourself accountable to a budget. Regularly checking your accounts can also help you spot fraudulent transactions before things get ugly. And immediately reporting these incidents to your bank will also save you from too much hassle.
Forming a healthy relationship with your credit cards takes a good dose of self-control and discipline, not only with your expenses but also with how you manage your finances. Resolving to keep track of everything you do with your money may seem challenging, but it does the job of keeping you out of financial trouble.