Savvy Spending: How to Use a Credit Card

Sunday, December 2nd, 2007 | Finance

I suppose that at this time of year, it’s hard not to abuse our lines of credit when we’re trying to spoil family members and friends with lavish Christmas gifts. Ideally we’ve been saving our paychecks instead to avoid using credit, or even handmaking our gifts for more special and cost-effective gift-giving (try BuyNothingChristmas.org for more cool ideas).

Being an ex-”credit card abuser”, I’ve compiled some tips to help climb out of debt, stay out of debt, and protect our credit score. Feel free to chime in with your own smart borrowing habits.

Savvy Borrowing Habits (How to Use Credit Wisely)

- Everytime you swipe your credit card, you are borrowing money. Many have the false mentality that credit card balances are “free money.” It is absolutely not! Creditors take advantage of this mentality by gradually raising our credit limits and keeping minimum payments low, knowing that the un-savvy borrower will keep spending and paying only the minimum payment every month.

- That said, borrow only when you need to, OR when you know you will pay off your balance by the end of the month. Using your Visa to finance big ticket items such as a laptop is smart because you can build your credit while being able to have something so essential. However, using your Visa for shopping sprees and entertainment is the worse thing you can do, especially when you only pay back a small fraction of that money every month. Before you know it, you’re buried in debt with little way out.

- Pay at least twice the minimum payment on your cards. When I took a look at my credit card statement, I noticed that the finance charges to my account were equal to my minimum payment! Meaning that, if I decided to only pay the minimum every month, I would never be out of debt. That sounds pretty twisted, and it is. This should be incentive to pay as much as possible on your credit card every month, and keep borrowing to a minimum.

- Try not to use more than %50 of your total credit. Your credit score depends on this, among other factors.

Dig Yourself Out of Debt (and Raise Your Credit Score)

- To start tackling your credit card debt, start by paying off the card with the highest interest rate. You’ll save more money in the long run. Also, stop using your cards while you are trying to pay them off!

Say you have three cards to pay off with $300 each month to do so:

Credit card #1 has a 22% interest rate, #2 has %18, and #3 has %16.
Pay $200 each month to card #1 (because it has the highest interest rate) and $50 toward the other two.
Once card #1 is paid off - congratulations! - put $250 toward card #2 and $50 toward #3 until card #2 is paid off.
Once card #2 is paid off, keep paying your $300 toward card #3 until it is paid off.
Having done this, you will have saved hundreds of dollars in finance charges, and be credit card debt-free.

- Always pay your bills on time. Otherwise, on top of late fees, your credit card score also suffers.

- Remember that everytime you apply for a new card (or your credit report is pulled for any reason), points are deducted from your credit score. That being said, be careful of how often you are applying for store credit cards, etc.

- Monitor your credit report. I use FreeCreditReport.com. The first 30 days are free, and thereafter I am billed $14 a month to keep an eye on my credit report. Monitoring your credit report is invaluable to measuring your progress and being sure that your accounts are up-to-date and accurate.

savings account

related posts:
Reader Poll: Cash or Credit?
Savvy Spending: How to Compare Credit Offers
How To Save Money

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10 Comments to Savvy Spending: How to Use a Credit Card

Tashina
December 2, 2007

This was an awesome post!! So much of that knowledge is stuff that I don’t think many people know or think about.

J
December 2, 2007

I wish I had a must-read blog like yours! This is one of your best posts yet, if not THE best. I had no idea I was hurting my credit by applying for store credit cards. They never tell you that! I’ve never actually had a credit card, but just having a bank account put me in debt because of essentially the same thing - borrowing money through Direct Deposit Advance and not being able to pay it back.

Also a great post on Christmas gifts. I might make a gift idea post actually. I often do thrifted gifts and pull it off.

GREAT POST!

Carressa
December 2, 2007

“Remember that everytime you apply for a new card (or your credit report is pulled for any reason), points are deducted from your credit score.”

Yes! I don’t think enough people know this.

kia
December 2, 2007

great post =)

megan
December 2, 2007

I wanted to apply for a card mainly to buy a laptop, but I’m afraid to get one, I still irresponsible at times and I think I would max out the card in a day

casey
December 3, 2007

Great post - it is hard to remember that credit cards aren’t free money. CreditCards.com has some good advice on how to pay off debt too. It may be worth transferring balances to a 0% interest card (depending on your credit history). That way you’re not paying interest while you pay off the debt.

Laarni
December 4, 2007

Thanks for sharing. I remember I saw on the news that these bad people made a fake swiper and it can record your credit card details. Scary.

Bobbi
December 6, 2007

What a great post! I wish I had seen that BuynothingChristmas.org web site before I started my Christmas shopping!

Jennifer
December 7, 2007

Awesome and super informative post! Very helpful tips!

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