Debt is all around us. It’s not something that most of us can escape, but that doesn’t mean we can’t make the most of it! According to a NerdWallet study, U.S. households carrying credit card debt from month to month will pay interest of $1,162, on average, this year. Paying any form of interest is not how you manage credit like a pro.
Unfortunately, most people aren’t taught how to handle debt and end up in a very deep and expensive situation. The good news? There’s always a way out! If you are working on becoming debt free or want to learn how to properly manage credit, keep reading!
Why Credit is Important
#1 – Access to funding for big purchases
You may be wondering what good is credit anyways. Fair thought! Credit is important for a few reasons, one of those being that it allows you to make big purchases when you don’t have all of the money up front. This is especially handy in situations where you want to buy a house or a car.
Credit will make it possible for you to borrow to purchase those big expenditures. If you don’t have good credit, the cost of borrowing can be more expensive than it needs to be.
#2 – Leveraged in background checks
Another reason why credit is important is because it can be leveraged by lenders to make a decision on your creditworthiness. Credit scores and history are available to potential employers, landlords and banks looking to loan you money. Not managing credit properly could result in missed opportunities.
#3 – Can come with savings, if managed properly
The third reason why credit is important is because if managed properly, it can come with major savings. Not only do most credit cards come with rewards, but if you have good credit, you can get promotional offers of little to no interest.
This means you’re saving automatically, especially if you would be forced to use credit anyways for your purchase. Read 5 Ways to Save Money Using Credit Cards for more information.
5 Ways to Manage Credit Like a Pro
#1 – Only spend what you can afford to pay off instantly
The best (and most important) way to manage credit like a pro is to only use credit for something you can afford to pay off instantly. With the exception of larger purchases (like homes and cars), you should only be using credit for things you can afford to buy.
When you get into the habit of using credit to buy things you otherwise couldn’t afford, you dig yourself into a hole. It can take years and years to climb your way out. Instead, manage credit like a pro by only spending what can be paid back before interest kicks in.
#2 – Never carry a balance month over month
Unless you are not being charged interest, it’s never a good idea to carry a balance month over month. This goes back to only spending what you can afford to pay back. If you are carrying a balance, you are likely being charged for that balance (i.e. interest).
The cost of carrying balances can be pricey, and it’s usually not worth it. If you find yourself in a position that requires you to carry a balance, make it a priority to get out of that situation as quickly as you can.
#3 – Be mindful of annual fees (and if they’re worth it)
Nowadays, a lot of credit cards and lines of credit come with annual fees. This is usually to pay for the rewards that they pay out. If you aren’t taking advantage of rewards, make sure it’s worth paying the annual fee. Otherwise, you may as well switch to a card with no fees and never have to worry about paying for it!
#4 – Use credit cards with rewards that will actually help you
Speaking of credit card rewards, become familiar with the policy around the rewards for your specific credit card. Some rewards expire. Some rewards have minimum balance requirements before cashing out. Leverage credit cards with rewards that you will actually use. There’s no point in paying the fee and not taking advantage of the rewards you accrue!
#5 – Don’t set up bills to be automatically paid with your credit card
Finally, my last tip to help you manage credit like a pro – don’t pay your bills with your credit card. Even if you can afford to pay it off, it’s not worth the risk. What happens if you pay your bills with your credit card, then an emergency comes up.
You use the money in your account (which should have gone to your credit card) and now you’re stuck with the balance. You have to carry the balance over a few months, just to get ahead. By now, you’re charged with interest. An emergency fund could help avoid this scenario, but it’s best not to play with fire to begin with.
Credit doesn’t have to be a bad thing! If you manage it properly, you can leverage it for your benefit! What experiences do you have with managing credit? Would you consider yourself a pro? Post a comment below to share your thoughts and questions!