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How to Manage Credit Cards

I have never been great at home improvement projects. I would rather have someone else fix my leaky faucet or repair my roof. But, I do have a toolbox, and I know that each tool has a very specific purpose. I also have a financial toolbox, and so do you. When it comes to finances, credit cards are like the hammer in the toolbox. They can be extremely useful and powerful. On the other hand, if you are not paying attention to them or using them in precisely the way they are supposed to be used, they can be dangerous and painful.

First of all, credit cards put you in debt. Even if it is temporary debt (meaning you pay off the balance each month), it is still debt. Debt is not always bad – in fact, it can be a good thing. Going into debt for important things like education or a house is usually necessary and perfectly acceptable. Debt becomes a problem when it is not managed properly. Let’s talk about how to manage credit cards wisely.

  1. Think of your credit card simply as a way to build credit. It may seem counter-intuitive, but you must go into debt to qualify for more debt. Lenders want to see that you have built a credit history and you can manage debt and repay in a timely manner. Years ago, when I was completely debt-free and proud of it, I could not qualify for a mortgage. Only when I started taking on some credit card debt and paying it back could I build a credit history and qualify for a loan.
  2. Choose a card with no annual fee. Set up autopay for the monthly payment or at least set a reminder each month to pay the bill.
  3. Practice using credit cards for limited types of expenses. For example, use a credit card for gas purchases only. That way, you can limit the credit card bill each month and ensure you will be able to pay it off entirely while still getting the benefits of building credit. While it may be tempting to charge all purchases in order to maximize the well-advertised credit card “rewards,” if you are not able to pay off the monthly balance or end up spending more than you would have without a credit card, the rewards are not worth it. They are not significant enough to risk encountering bad debt.
  4. Do not use your credit card as an emergency fund. Your emergency fund should be built separately. Please refer to my article “Glenn’s 5 Money Habits” for more information on emergency funds.
  5. Be aware of the pitfalls of credit cards which can end up sabotaging the benefits. If you miss a payment, late fees are significant. If you don’t pay the balance in full each month, steep credit card interest adds up quickly. Missing payments, carrying a high balance, and having too many open credit card accounts can lower your credit score significantly.

The next time you pick up a hammer or start a home improvement project, think about the tools in your financial toolbox. Remember, debt and credit cards are a powerful tool and can be helpful or dangerous, depending on how you use them. And, that’s hitting the nail on the head.

If you have any questions about investing or are wondering how you can get started, I would be happy to meet with you for a no-cost consultation. You can e-mail me at gleest@wtwealthmanagement.com or call (928) 225-2474.

Sincerely,
Glenn Leest

Gleen Leest

References:
NerdWallet: Pros and Cons of Shopping with a Credit Card

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