When used correctly, credit cards can be a means to more financial freedom. They give you greater spending power month-to-month, help you afford big purchases and can improve your credit score if payments are managed well. However, it’s all too easy to fall into the trap of borrowing beyond your means, and missed payments could lead to debt and a damaged credit rating.
Follow these tips to discover how to benefit from the advantages of having a credit card without going into debt.
Set a monthly spending limit
As with any financial investment, budgeting is vital to ensure you don’t spend beyond your means. Calculate how much you can afford to repay each month and treat that as your maximum, even if your official credit limit is higher.
Bear in mind additional charges that may apply. Typically, providers have an initial 0% interest period but after that a standard interest rate will apply to any outstanding balances. Staying within your means and paying off your credit card in full each month avoids you having to pay interest.
Track spending in real-time
Sticking to your budget is easier than you might think. These days, you’ll find a choice of credit cards that let you track your spending in real-time via apps connected to your smartphone. Before you make each purchase, you can check the balance and ensure you’re still within your budget.
This can give you greater confidence with using your credit card as it provides reassurance that your spending is affordable.
Plan ahead for big purchases
A major advantage of credit cards is they let us afford expensive purchases sooner, letting us spread the total cost over time rather than forking out the entire amount upfront. Many people have them exclusively for this benefit, using them to buy big household items or pay deposits on holidays.
Be careful of impulse spending on high-ticket items, however. They can significantly increase your monthly credit card minimum which could leave you unable to keep up with repayments. Plan ahead where possible and always calculate whether you could reasonably afford the repayments before going ahead.
Use it for your essentials
Yes, that’s right – credit cards shouldn’t be exclusively used to spread the cost of big purchases! Most companies offer credit card rewards that you earn as you spend such as air miles, shopping loyalty points and cashback. Using them for your monthly essentials which you budget for regardless such as grocery shopping, subscriptions and utility bills is an easy way to earn as you spend.
Demonstrating that you can manage your essential spending well each month goes a long way to improving your credit score. Using your credit card to settle contractual charges such as your mobile phone plan will have a double-whammy effect.