Proper Credit Card Management

There are some people that feel that they should not have credit cards at all. Credit card ownership, like all forms of revolving credit, requires a certain amount of self-discipline, and they feel that this is lacking in them.

Having self-discipline is very important in managing one’s finances anyway, although if you’re working with a limited budget, the downside of mismanagement is limited to your liquid assets generally, and usually just those that are readily available, such as what you have in your checking and savings accounts.

Proper Credit Card ManagementWith credit cards though, as well as with other forms of borrowing, you can go into the hole, and maintain a negative self-worth and perhaps get to the point where you cannot meet your obligations. So now you have all the troubles you started with as far as managing your finances, and have defaulted on your credit card or credit cards as well.

Defaulting on credit products is never a pleasant experience, but there is a bright side to this, and that is once you do that, it will be a long while before anyone is willing to offer you a regular credit product, although you can always get a secured card.

It’s not just default that people are concerned about, as often times they are able to keep things together after racking up their credit cards too much. However, the interest payments that they now have to make, that they would not have to make if they did not get themselves in trouble with their credit cards, may take away from their enjoyment of life, especially given that money was already tight before this and now they have to make even more sacrifices.

You Don’t Have to Necessarily Cancel Your Cards

While people would usually recommend that these folks avoid credit cards, the problem isn’t that they have the cards, it’s that the level of available credit is too high. You can always reduce that, and often times without even having to speak to anyone, as you may be able to do that yourself on your credit card’s website.

The more you may be tempted to act against your long-term interests by putting too much on your credit cards, the more important this becomes, and by keeping your credit limits comfortable, you can enjoy the best of both worlds, having a credit card or cards without being exposed to too much risk or trouble.

If you just cut up the cards and cancel the accounts, and you have no active credit products, this not only takes away the ability to use a credit card when you need to, for instance to book a hotel room, rent a car, buy something online, and so on, it also may result in the loss of your credit history. Down the road if you need to apply for credit and your circumstances have improved such that now you are comfortable, you probably now won’t be able to get it and will have to start all over again building your credit back up.

Some people do cut up the cards or do things like putting them in a block of ice, but if you cut them up you will have to order another one if and when you want to use it again, which can take a couple of weeks or so to arrive. The block of ice is at least a better idea, as you can undo this more quickly as needed.

If you reduce your credit card limit, you do have to be aware that it’s easier to put it down than have it put back up, putting it down is super easy, getting it increased again isn’t so simple. You will need to apply for the increase, although if you’ve been responsible with the use of the card while the limit has been lower, this shouldn’t be much of a problem.

Controlling Your Credit Card Spending

Ideally, credit card usage is limited to making purchases on them that can be easily repaid without accruing interest. This is pretty easy to do, as all you need to ensure is that you never buy anything that you do not have the money to buy already.

The reason why you would want to put your purchases on your credit cards instead of paying by cash or with your debit card is to collect the rewards that credit card companies pay for using their cards, so the first thing to do if you’re interested in this is to make sure that you have credit cards that do pay these rewards.

Otherwise, there’s no reason to use a credit card other than in cases where you do not have the money to buy something and wish to pay for the purchases over time, and pay interest. If you have or can qualify for a lower interest option such as a bank line of credit, it’s always preferable to pay less interest than more, and most credit cards charge considerably higher interest rates than you would get with a line of credit.

If you are paying annual fees for your credit card, you should think carefully about whether you are getting good value for these fees. Sometimes you might, for instance a particular card might have a rewards program you like and you may be able to do better with this overall than with no annual fee options, but few people bother to make these calculations and often paying the fee offers less overall value.

If you do need to borrow, or would like to, and have no better options than carrying the debt on a credit card, it’s important to view the purchase in terms of its likely overall cost over time. People don’t often do this, they just don’t tend to think very much on how much extra something will cost them over time with interest included, but things can cost considerably more this way, depending on how quickly or slowly you’re able to repay the debt.

Saving Versus Borrowing on Credit Cards

The first thing to decide though is whether or not you should be making the purchase in the first place, and if it’s something you can’t afford, putting it on a credit card makes it even more unaffordable, not less.

Making smaller payments over time can certainly make something seem more affordable, and merchants have been relying on this concept for a very long time, but it’s actually more of an illusion.

If you really can afford something, and you don’t really need it right away, it’s best to look to save up for it instead. If you can’t save up for it, you can’t buy it on credit either, because that involves setting aside an even larger amount due to the interest that is added to the payments.

There are situations where you just need to have something now though, and while you could say that you may have tried harder to prepare for this situation by not having enough savings, the truth is that right now you don’t, and buying it with your credit card may be the only good option.

The secret to being able to save money comes down to simply spending less than you earn, although people who spend a lot on credit cards tend to be the kind of people whose love of spending often exceeds their income. In spite of how popular this is in our society, it does not make this strategy any less sound.

There is even a phase in life where it is expected that people will buy more and save less, in the early third of one’s career, and while one’s income tends to be less during this phase than later in their career, this is not an excuse to manage your affairs less well.

This doesn’t mean that people won’t be tempted here, a lot of people are, but if we’re really concerned with sound financial management we’ll at least look to start saving early in our careers as well, or at least not run up a lot of debt and devote too high of a proportion of our income to interest payments, due to a lack of patience.

That’s a distinguishing feature of people who are more mature, at least generally speaking anyway, as they develop more patience in waiting for certain things versus wanting everything right now, and having this impatience cost them in the pocketbook, lessons which they have learned.

Borrowing When It Makes Sense to You To

Some things you just have to borrow for, like a home, but with some other things, things that we might think are essential but really aren’t, we need to at least question our borrowing to get them now versus later, especially if we are borrowing by way of high interest credit cards.

Often times, this is what it really comes down to, getting something right now by using plastic and setting aside money each month to pay for it, versus setting aside money now and waiting until enough is set aside to make the purchase ourselves.

In any case, we do need to pay close attention to our credit card spending and our credit card balances and look to ensure that these cards are a benefit to us overall, and sometimes that may indeed be using them to buy things we could have saved for, depending on how much we value getting them now versus later. This isn’t necessarily a bad idea, provided that we give these purchases enough thought and not act too impulsively.

Overall, credit cards can be a tool for good or they may be a source of pain, but by taking enough time to reason through our decisions on the use of our credit cards, we’re at least making the effort to ensure that we’ll benefit from them overall.

Ken Stephens

Chief Editor,

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

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