We all know that the many conveniences of credit cards can backfire, leading to a high amount of credit card debt and lots of worry about how to pay it all off. If you’re in that situation now – or you just want to make sure you avoid the credit card debt trap – here’s some good news.
Credit cards don’t have to lead to financial troubles if you make the most of their benefits and advantages and avoid the many credit card traps that can snare you along the way.
1. Transfer debt to a 0% APR card
One of the smartest ways to use a credit card when you have too much debt is to apply for a balance transfer card with an introductory 0% APR for a year or longer. That way, you can transfer credit card and loan balances to the new card and pay them off without paying hundreds of dollars in interest that you would have otherwise paid.
Be careful, though. This smart credit card move can backfire if you start charging purchases, which could have a higher interest rate. And when the introductory 0% APR ends, the new card’s APR typically jumps to a much higher interest rate. Better to make no new purchases and focus on paying off the transferred balances.
2. Pay off the balance each month
One thing that makes credit cards so convenient is the fact that you aren’t required to pay the balance off each month. However, that’s not a smart way to use your credit card, since you will pay interest on any remaining balance.
Paying off the entire statement balance by the payment due date also has additional advantages. You’ll have an account with a good payment history on your credit report, and payment history accounts for around 35% of your credit score. Plus, paying the balance off each month keeps you from getting into trouble by taking on too much credit card debt.
3. Get a sign-up bonus
If you have good to excellent credit, you may be able to be approved for a credit card that offers a sign-up bonus, which could range from $100 to as much as $500. Here’s the catch, though. To receive that “free” money, you must charge at least a certain amount in purchases – anywhere from $500 to $3,000, for example – over a specific period such as the first 90 days.
The sign-up bonus strategy can come back to bite you in the balance if you’re not careful, however… If you don’t pay the balance off monthly, making all those purchases just to get to the amount where you receive a sign-up bonus can lead to too much debt. You could also end up paying more in interest than you netted with that sweet bonus.
Tip: Unless you’re highly disciplined and know that you can pay off the statement balance each month, go for a card with a smaller sign-up bonus – $150 or $200, for example – that requires a smaller amount in purchases such as $500 over the first three months.
4. Purchase protection
Many credit card issuers offer purchase protection, a perk that reimburses you up to a certain amount if an eligible item you purchased with the credit card is lost, stolen or damaged within a specific period such as 60 or 120 days. Credit card purchase programs vary, with different requirements and limitations on the types of purchases covered.
Paying for an expensive purchase such as a home appliance or electronic device can be a smart way to use a credit card that offers purchase protection. Just make sure you pay that big purchase balance off as quickly as possible to avoid paying interest or running up too much credit card debt.
5. Use the card to build good credit
The smartest way you can use a credit card is to establish and build good to excellent credit. If you’re just starting out with a credit card or trying to rebuild a poor credit history, make one or two small purchases each month – even as small as a cup of coffee or a few grocery items, for example – and pay off the full balance each month. Before long, your card’s good payment history can raise your credit score significantly.