Avoiding Credit Card Debt

Learn how to use credit cards wisely so that you don't get buried in credit card debt.

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.

Don't Use Your Credit Card as a Loan

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.

Charge Only What You Can Afford

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:

  • You have cash in the bank to cover the purchase. If you have sufficient cash in the bank to make a purchase, go ahead and charge it if you wish. Then pay off the balance in full when you get the statement.
  • You don't have enough cash to cover the purchase, and the item is not for an emergency. If you don't have enough cash to purchase the item or service, don't charge it. Instead, save your money (preferably in an interest-earning savings account) until you can afford the purchase.
  • You can't afford the item or service, but you need it right away. If you can't afford an item or service, but need it now (for example, you must repair your car so you can get to work), charge it. But, at the same time, make a plan to pay off the balance over time -- figure out how much you can pay each month and how long it will take you to pay the balance off. Then, stick to it.
  • Don't charge something if it won't exist when the bill comes. A good way to cut down on credit card debt is not to charge anything (like a meal, groceries, or going to the movies) that won't exist when the statement arrives. By paying cash for these kinds of things, you save your credit for true necessities.

Create a Budget

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).

Pay All (or Most) of the Balance Off Each Month

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.)

Pay on Time

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.

Have Only One or Two 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.

Don't Get Cash Advances

There are three reasons why you shouldn't use a credit card for cash advances. You will:

  • pay higher interest
  • pay transaction fees, and
  • not get a grace period (which means you pay interest from the day you get the money, even if you pay your balance in full when the bill comes).

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.

Don't Sign Up for the Special Services

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 Good Records

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).

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