Without a doubt, credit cards can be useful, beneficial, and even positive tools in your financial world when used correctly. As many problems as credit cards can cause for consumers that use credit to spend money they don’t have and live beyond their means, using credit correctly can help you make important purchases for your household and even afford big expenses like new electronics and that dream vacation your family wants to take. The problem is that as easy as credit cards can make your life, they can make it equally difficult when credit is misused.
Call us at if you have questions about interest rates and how they apply to your debts, or if you find yourself in over your head. A certified credit counselor can provide the answers you need when it comes to understanding credit card basics, as well as provide options to help you reduce your credit card debt if you’re struggling.
The pros and cons of credit cards
There are definitely benefits to using credit cards, but there are also certain risks involved that can make them dangerous for your financial future. Understanding the advantages and disadvantages of your credit cards can help you manage your money more successfully.
- Provides a means to buy items you need now
- Offers the ability to purchase big-ticket items more readily
- Reduces the need to carry cash
- Creates a record of your purchases for better tracking
- Provides added protection on purchases
- You pay more for items you buy on credit, because of interest and credit card fees
- Higher risk for financial difficulty if you spend beyond your means using credit cards
- Increased risk of impulse buying
The most critical factor in using your credit cards successfully is to be responsible with what debts you take on and how you pay them back. Bad habits like using credit to buy something you can’t really afford or using credit to try to cover your monthly bills when you’ve spent beyond your budget are easy ways to get into serious financial trouble.
The following tips can help you use credit more effectively in your daily life:
- Using credit cards successfully. If you can’t afford to save up for a few month and buy that television you want outright, then you probably can’t afford the credit card payments either. Credit can be used to buy things you can afford faster, but it shouldn’t be used to buy things you can’t afford at all.
- Always pay your credit card bills on time. Credit cards often have a penalty APR that can be applied if you’re late or miss a payment. This interest Understand APR rate is usually much higher than your standard rate and can be applied by your creditor for up to 6 months after you paid late that one time.
- Know how much you owe. Don’t just pay your debts without paying any attention to how much you owe. A penalty APR may also be applied if you go over your credit limit, so make sure to monitor the balance to ensure you stay within your credit limit.
- When possible, pay more than the minimum amount due. Paying only the minimum amounts due on your credit cards can keep you in debt for decades even if you stopped making any other charges on the credit card. Paying more than the minimums is part of any successful strategy in managing your debt. You can use a debt calculator to see how soon you can pay off your debts given various monthly payments.
Having credit card debt doesn’t mean your finances are in trouble, but having too much credit card debt is usually the first sign of a personal finance problem. Although everyone is different, on average your credit card debt should not exceed about 15% of your total take-home (net) income. In this way, if you take home about $1500 per month then all your credit card debt minimum payments should total no more than $225 per month. However, if you bring home $1000 per month, $225 in credit card bill payments may be verging on causing at least some distress in your finances; in this case, you ideally want your total credit card bill payments to be around $150 total.
Keep in mind that this 15% estimate is based on an idea of maintaining a healthy financial outlook, so it includes setting aside money each month for savings. While you may be able to afford making credit card payments each month that total more than 15% of your income, this won’t leave much money available for savings, retirement, and planning ahead for bigger expenses. You can also use a debt-to-income ratio calculator Debt Calculator to see if your debts are within a healthy range for your finances. When combined with other debts, such as your mortgage and car payment, experts agree your total debt should not exceed 36% of your total net income.