Credit cards, if used unwisely, can lead to a mountain of debt. If you charge more than you can afford, make low monthly payments, or pay late, you may be headed for trouble.
However, if you learn to use credit cards wisely, they can be convenient, help build good credit, and prove useful in emergencies.
A credit card can be two things, depending on how you use it. If you carry a balance, it is a very high interest loan. If you make only the minimum payment (usually 2-3% of the balance) each month, you will be paying off the debt for years and years to come, including a huge amount of interest. (For more on understanding credit cards and their terms, see Nolo's article Shopping for Credit Cards.)
On the other hand, if you pay off the balance each month, a credit card becomes a convenient way to purchase items and services without carrying around a lot of cash. Use your credit card as a cash substitute, not as a high-interest loan.
Don't use a credit card to finance an unaffordable lifestyle. If you can't pay off the entire balance every (or almost every) month, then you are overspending. Use these guidelines to determine what you should and shouldn't charge:
If you cannot keep your credit card spending in check, create a budget. (For information on how to create a budget, see Nolo's article Budgeting: How to Make a Budget.) Make each credit card purchase only within the framework of your budget. If you can't stick to your budget, then don't carry your credit card with you (you may want to keep one in the house for emergency use only).
The single most important rule about wise credit card use is this: Pay off the entire outstanding balance each month. If you must carry a balance from time to time, pay off most of the balance each month. If you can only make the minimum payment each month, you are in over your head. Stop using the credit card until you pay the entire balance off. (If you are struggling with credit card debt, see Nolo's article Dealing With Debt: An Overview of Your Options.)
Penalties for late payments add up. And, many credit cards jack up your interest rate if you pay late a few times. Late payments also damage your credit report. For more on credit card late fees and interest rates, see Nolo's article Shopping for Credit Cards.
You really only need one card, or two if some vendors don't accept your main card. With one or two cards, you can keep track of purchases and make sure you pay each on time. If you have to use one card to pay off the balance of another, you are in trouble.
There are three reasons why you shouldn't use a credit card for cash advances. You will:
Instead, go to the bank or use an ATM card. For information about grace periods and transaction fees, see Nolo's article Shopping for Credit Cards.
Credit card issuers bombard cardholders with ads for products such as credit card fraud protection plans, travel clubs, and life insurance. These are almost always overpriced or provide something you don't need. Shred the ads you receive without reading them.
Keep all credit card receipts and reconcile them with your statement each month. Review the statement as soon as you get it.
A careful review of your statement is the only way you can detect mistakes or fraudulent charges. To limit your liability, you must deal with these immediately. (For information on dealing with mistakes and fraudulent charges on your credit card statement, see Nolo's article What to Do If There's an Error on Your Debit or Credit Card Statement.)
For more information on finances, debts, and how to regain financial health, read Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard with attorney Margaret Reiter (Nolo).