Scarborough Debt Counseling: 5 Ways You Should be Using Credit Cards
For some people, the words “credit cards” conjure up thoughts of crippling finance charges, endless minimum payments and debt collectors. But in truth, credit cards can offer some serious benefits and discounts.
Some companies offer travel insurance, fraud protection, rewards or cash back. Some even offer a discount or deferred interest when you make in-store purchases using a store credit card. In some ways, credit cards are safer than carrying cash, and often more convenient. When used wisely, credit cards can be a wonderful tool for your financial toolbox.
Again, that’s when they’re used wisely!
When used irresponsibly, credit cards can be an easy way to spend your way into a hole it can take years to dig yourself out of. At Scarborough Capital Management, we have seen this happen even when someone may start with the best intentions.
So, how do you make the most out of credit card benefits without spending more than you can afford to pay back and falling into debt?
There are 5 things you should do when opening a new credit card. (If you do find yourself in debt, we will also share some important Scarborough debt counseling tips that can help you pay it off.)
Have a Reason for a Card
Whether it’s to track cashflow, establish or improve your credit, take advantage of rewards or cash back on purchases, or to keep on-hand in case of emergencies, you should have a good reason to open a credit card account. Studies suggest that people who pay for purchases with a credit card tend to spend more than people who use cash, so not having a clear, legitimate intention for having a credit card and a plan to manage spending and paying it off could spell disaster.
On the other hand, making purchases you can afford as well as regular, on-time payments can be a simple but effective way to build credit or improve your credit score.
There are a number of credit card companies that offer a variety of different types of cards and programs. Even if you decide you want to open a certain type of rewards card, there are still many options to consider:
- Is there an annual fee, and will you earn enough in rewards to offset the fee?
- How does the interest rate compare to other similar cards?
- Is there an interest-free period and can you pay off any debt by then? (If you can’t pay off the entire balance each month, you’re likely to pay more in interest – often considerably more – than you earn in cash back or rewards.)
Pay Off Immediately, or at Least More than the Minimum Payment
It would be easy to avoid credit card debt by avoiding credit cards altogether, but that’s not always realistic in today’s society. Besides, there’s a simple way to use your card but keep the balance at $0 and never incur a cent in finance charges.
If you pay the full statement balance each month by the due date, you won’t pay any interest. This is the best way to reap the benefits of your credit card without incurring hefty interest fees. If you can’t pay the entire balance, try to pay as much as you can, and more than the minimum payment whenever possible. Making only minimum payments will lengthen the amount of time it takes you to pay off a balance and increase the amount of interest you’ll pay over time.
If you’re using a points or rewards card, which often come with higher interest rates, hefty finance charges can eat away at any rewards you’ve earned, negating the benefits of having the rewards card in the first place.
If You Plan to Use a Card for Emergencies, Know What an Emergency Is
Sometimes you have to put a large purchase on a credit card because you can’t afford to pay for something now, and you may not be able to pay it off next month to avoid interest. But the purchase is something you need – maybe a home or car repair.
Credit cards can help in an emergency such as this, but it’s important to be able to distinguish between an actual emergency and an unnecessary expense, like a last-minute vacation or the impulsive purchase of a designer bag.
Don’t Think of it as Free Money to Spend
It’s important to remember that credit cards are basically a loan, and whatever you spend on a credit card this month, you will have to pay for next month. Try not to charge more on a credit card than you could comfortably pay back. If your balance starts to creep up, the finance charges can begin to accumulate faster than your payments can reduce the balance, and late payments and a high credit-usage ratio can really impact your credit score.
The rule of thumb is you should be utilizing less than 30 percent of your available credit to maintain a good credit score.
How a Financial Advisor Can Help
While credit cards may not be the first thing that comes to mind when you think of reasons to consult a financial advisor, someone who intimately understands the ins and outs of interest rates and budgets might be just the person to help provide you with some perspective, give you a clear picture of your debt, and help you set up a budget and establish a plan to pay off your debts.
At Scarborough Capital Management, when we establish a comprehensive financial plan for a new client, we take more into consideration than just investments. We discuss each client’s specific situation, concerns and goals. Debt counseling is a big part of that for many people.
Tips for Paying Off Debt if You Find Yourself in Trouble Already
If you’ve already racked up some credit card debt, it’s time to get organized and disciplined. Here are a few debt counseling tips that can help.
- Gather all of your statements and write down balances and interest rates.
- Focus on paying down the debts with the highest interest rates or the lowest balances.
- As you pay off an account, add the amount you had been paying toward it to the payment you make toward another account, with the next highest interest rate or next smallest balance.
- Consider taking advantage of a 0 percent balance transfer offer. You might have as many as 12 or 18 months without interest to pay down any debts you transfer to that account, but this method is risky if you can’t trust yourself not to incur further debts. Also, the 0 percent rate will likely cost you up front. Many 0 percent balance transfer offers charge a balance transfer fee, usually 3 to 5 percent of the amount you are transferring. Also keep in mind that any amount you haven’t paid off after the introductory period is subject to interest.
Securities through Independent Financial Group, LLC (IFG), a registered broker-dealer. Member
FINRA/SIPC. Advisory services offered through Scarborough Capital Management, a registered
investment advisor. IFG and Scarborough Capital Management are unaffiliated entities.