1. Helpful, But Not Helpful
Credit cards are fantastic. They are a great way to track and manage spending as well as being a big help in building a budget. But the high interest rates on long-term credit card debt makes them the dumbest form of debt – short of getting a payday loan. The trick is managing them properly.
2. Pay Now, Not Later
You’ve heard this before, but paying off the full balance each month of your credit cards is a must-do first step. The interest-free period that many cards offer means you effectively get a free loan that you can use to make purchases if your salary or wage payments are irregular or you have unexpected bills. Depending on the card, you are also likely to get purchase insurance and other perks.
3. Not Interested
I’ll say it again. It makes no sense to carry debt on a credit card. If you want to build wealth, you simply can’t do it. If you need to make a purchase, there is no reason to pay the 18 to 20 per cent interest rate that most cards charge. To boil that down, the monthly interest bill at 20 per cent on a $15,000 credit card debt is going to be about $250. The monthly interest bill at about 8 per cent if it was an unsecured personal loan – which is exactly what a credit card debt is – would be $100. By the way, on a housing loan it would be closer to $50.
4. Shop Around and Cut It Up
A lot of cards charge interest rates in the 18 to 20 per cent range. But a lot don’t. If you find yourself building a balance that you are having trouble paying off, find a card with a cheaper rate and transfer your balance. Then cut your card up and don’t buy anything more on the card until you have paid off the balance.
5. Think Debit
Many of the perks that credit cards offer – points, insurance, convenience – also come on debit cards. A debit card acts just like a credit card but it uses money you already have rather than money you hope to have. Remember though, they are linked to your bank account so when shopping online debit cards may expose your bank account to online fraud.