When reading personal finance, money management and debt repayment advice, one of the most significant, repetitive themes that comes up is credit card spending, and more importantly, don’t do it…
But is that really true?
It is true that credit card companies want you to land yourself in debt, because that’s how they make their money – you borrow money you don’t have, and they charge you interest until the day you’ve paid it all back.
But surely there are ways of using credit cards to our advantage? After all, some of the wealthiest people can always be seen paying for things using credit cards, despite having the money to pay for it upfront?
There are indeed plenty of ways that you can use credit cards to your advantage. Whether it’s to build up your credit score or earn points and cashback on your everyday purchases.
If you’re really smart, you might do all your spending on a credit card with a long interest free period, whilst putting your cash into a high interest savings or investment account. When the interest free period is over, you can pay off the balance in full and you’ll have earned interest on your money that otherwise would have been spent right away. This is called stoozing.
Whatever the reason you might want to use a credit card, there are a couple of golden rules which need to be followed at all times when it comes to credit cards, to be sure that you don’t pay interest, and you don’t end up damaging your credit score.
5 Golden Rules Of Credit Card Spending
PAY IT OFF EVERY MONTH
Pay off your balance every single month to ensure that you don’t make any interest payments. The best way to make sure you don’t forget is to set up a monthly direct debit to pay off your balance in full at the end of the month.
This way, you won’t be tempted to miss payments, and you won’t risk forgetting by accident. If you have a 0% card, then you don’t need to pay off your balance in full every month, but make sure you do pay at least the minimum payment, and pay any remaining balance off in full by the end of the 0% period.
DON’T EXCEED MORE THAN HALF YOUR LIMIT
Credit scores are made up of a number of factors, including age, affordability, repayment history and use of available credit.
Use of available credit means that lenders look at how much of the credit available to you is currently being utilized. A high credit usage, suggests that you have poor money management skills, and are an over-spender who doesn’t pay money back on time.
The sweet spot of available credit usage is somewhere around the 30-50% mark. Using to little of your available credit isn’t a bad thing, but if you’re trying to improve your credit score, then having a low credit usage gives lenders little data to work with to track your spending habits. Once you go over 50%, it makes it look as though you need the money, and lenders don’t want to work with desperate borrows.
NEVER TAKE OUT CASH
If you only follow one rule from this list, then make it this one.
Never, ever, take cash out from an ATM using a credit card. Not only will you pay higher interest, plus a cash withdrawal fee by doing this, but it suggests to your credit card company that you have no money in your bank account and are in immediate, desperate need of money – not a good sign.
If you really, really find yourself in a pinch for cash, or urgently need to withdraw cash while you’re out and only have a credit card with you, then you’re much better to go into a supermarket, buy something and ask for cashback when you pay. This won’t show on your statement as a cash withdrawal.
NEVER BUY SOMETHING YOU CAN’T AFFORD
Don’t use credit cards to fund a purchase that you can’t otherwise afford, unless you’re absolutely certain that you’re going to have the money in the short term future – perhaps you’re waiting on a bonus payment to clear from work etc.
Only buying what you can afford keeps you in the mindset that you’re only using credit cards as a tool to make more money, or improve your credit score rather than to fund purchases that you shouldn’t be making. It’ll also help to keep you in a position to pay off your balance in full every month.
Even if you have a poor credit score, you should look to see if you’re eligible for a balance transfer credit card.
Balance transfer accounts allow you to consolidate debts into one place and offer a 0% interest period to allow you to get ahead on your repayments.
The better your credit score, the longer 0% period you’ll be eligible for, but even if your score is poor, you could find a card that offers a short term interest free period such as 3-6 months.
As long as you meet the minimum repayments, this’ll help you start to chip away at repaying your balance, and will also make a start on improving your credit. Once your interest free period is over, if you still can’t afford to repay the full balance, then look for another 0% balance transfer offer with a different card provider and do the same thing again.
There is usually a transfer fee to be paid, but it’s nominal most of the time and you’re much better to pay that as a one off than to carry on paying extortionate amounts of interest month after month.
To Finish Off…
I really hope that you enjoyed this post and if you’re struggling with debt or understanding how to use credit cards to improve your credit score, that this post has shone a light on some of the basics.
Let me know any tips you have for managing or repaying debt, or feel free to share any of your personal finance stories in the comments below.
Make sure to check back here soon, as I post brand new lifestyle, personal finance and fashion advice on The Angelina Archives every single week.