​Using your credit cards wisely might be one of the most important decisions you can make towards overall financial health. The reasoning behind this is incredibly simple; high interest rates on credit cards can cost you a lot more than money if you can not make your payments on time, every time, without fail.
For most people, rent or mortgage payments, along with auto loans, are the two largest debts they carry in terms of actual dollars. These two payments often account for well over 30% of someone's take home pay each month. When credit cards and personal loans are added to this mix, the overall debt costs each month can quickly reach 60% or more of your take home pay. Having this much debt does not leave a lot of money for other living expenses such as food, clothing, utilities etc. For most consumers, the payments on their credit cards or personal loans are also the highest interest rate loans that they have. There are many reasons why credit cards can specifically become the biggest threat to your overall financial health. The number one reason is that credit cards are so easy to use. The number of people who use credit cards for everyday purchases is incredibly high. Consumers tend to forget that if they do not pay off the entire balance each month, they will be charged interest. Most credit card companies will happily charge you as much as they legally can for the credit they are extending to you.
To make matters worse, if you are late on your payments, or if you do not make any payment at all, the credit card companies will ruin your credit score. 35% of your FICO score is based on credit repayment frequency and timeliness. It does not take very long for delinquent payments (or non-payment) to derail your credit score. Additionally, these negative marks on your credit report can stay there for up to seven years. These negative marks against your credit will to either deny you future credit, or cost you much higher interest rates on new accounts. To make this incredibly simple, late payments will simply cost you more money in the future.
The very best way to handle your credit cards is to pay off the balance each month. This not only makes your credit report look good, but it also keeps you from paying high interest rates. The second thing to do is to avoid using your credit cards for unnecessary expense. Instead of paying with your credit card, try using your debit card, or that green stuff called cash. This one incredibly simple action can save you more money than you ever imagined. If you feel you are already in trouble with your credit cards, sit down with your statements and make a plan to begin paying them down. I suggest you look at my Budgeting 101 page for more help on getting out of your situation. Start by using the debt snowball, or paying off the credit cards that have the lowest balances. Once these are paid off, move to the next lowest balance and begin paying that card down by adding the same amount you were paying on the now "paid off" card as well as the regular payment you make currently. It will take patience and some financial sacrifice, but it can be done. |
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