Work and Money
How to Develop a Healthy Relationship With Your Credit Card
Do you remember when you got your first credit card? Was it on a college campus where you were offered a free T-shirt in exchange for signing up? Or what about when you received an offer in the mail that you just couldn’t refuse? Maybe you saw a commercial or applied online and figured getting a credit card was just the next step in becoming a responsible and independent adult. Either way, possessing a credit card might have become a necessity for you despite the financial risks that come with the territory, including overspending and acquiring debt.
As a young adult, I heard all the warnings about not getting a credit card because it could lead to debt. More than half of all American adults have credit card debt — some in the thousands. However, I learned a lot after signing up for my first crappy credit card that happened to charge a $10 monthly maintenance fee.
Credit cards themselves are not evil and don’t automatically mean you’ll go into debt. It’s important to develop a healthy relationship with your credit card so you can use it wisely as a tool to build your credit score. Here are some easy ways to develop a healthy relationship with your credit card — and your money, for that matter.
Set a Budget
Credit cards aren’t free money, and I like to steer away from using cards as a backup to fund unexpected expenses. It’s all too easy to just charge something to your card with the good intent that you’ll pay it back later.
However, if there’s no real plan for paying that card balance off, that’s where problems can start to arise. Try setting a reasonable budget for your credit cards each month. That way, you can plan ahead and organize your funds to pay the bill on time.
For example, if you’re planning to spend $250 using your credit card each month, you can budget $250 from your paycheck to pay the bill each month. If you don’t have any separate savings or an emergency fund, you may want to limit your credit card budget and usage until you feel comfortable with your savings amount and ability to manage everyday expenses.
Spend With Purpose
Let’s face it, everyone splurges a little at times. But you probably can’t afford to walk into a store or shop online constantly. My favorite “someone needs to hear this today” reminder on social media is this one: I don’t need to buy anything online today.
I absolutely love online shopping and how anything I need or want can be found and ordered with just one click. However, this doesn’t mean that I should buy the thing that pops into my head right at the moment. It’s important to start by focusing on my needs and prioritizing my wants.
I like to ask myself these questions before spending unnecessary money that could lead to a negative relationship with my credit cards:
- Do I need this or do I simply want it?
- What’s the downside or risk of not obtaining this item, product, or service right now, and can it wait?
- What are my top priorities for my finances this month? Does this potential purchase align with that?
- Can I truly afford to buy this thing?
It also helps to think about what people did before credit. If they didn’t have the cash on hand to buy something, they just waited or did without and survived just fine. Delaying gratification can be very humbling and a great reminder to spend with purpose and intention.
Pay Bills on Time
Paying your credit card’s minimum payment each month is a must. If you don’t, you’ll likely get slapped with a late fee ranging from $28 to $39. Ouch. That’s a month’s worth of coffee or almost the amount of my cell phone bill.
What’s worse is that the credit card company may even report the late payment to the major credit card bureaus, which could negatively affect your credit score. This is why it always helps to set up automatic bill pay, especially if you have more than one credit card. It’s so easy to forget but by making it automatic, you’ll at least pay your minimum credit card payment each month on time.
While it’s sometimes okay to keep a small balance, keeping a large credit card balance month after month and only paying the minimum can damage your score, too. The general rule of thumb is to keep your credit card balance below 30% of your total credit limit. This means if you have a limit of $1,500, you may not want to keep a balance of $450 or more on the card once your statement cycle closes. According to Experian, your credit card utilization can impact 30% of your score, so it’s an important factor.
Don’t Get Sidetracked With Rewards
Who doesn’t love rewards? I love using my credit card to earn cash back and bonus points for travel, but this is all a bonus reward for me. Credit card rewards are only worth it if I’m able to pay off my bill in full each month and avoid other fees.
Keep this in mind: If you’re earning 5% cash back on your $300 grocery purchase but paying 20% APR on that $300 if you don’t pay off the card balance, this literally cancels out your cash back rewards. Interest charges are where companies make money off credit card users — so don’t get lured into overspending and getting into debt just to receive a small reward.
Credit Is a Tool
Ultimately, realizing that credit is a tool is one of the best things that helped me develop a healthy relationship with my credit card. Credit cards aren’t free money. They come with high fees and sizable interest rates. However, when used wisely, credit cards are one of the best tools to help you improve your credit score.
Still, they are only one aspect of your financial profile and can be used strategically to help you meet other money goals.