Credit card debt can be devastating, and hold you back from reaching many of your financial goals. However, that doesn’t mean that credit cards themselves are evil. In many cases, credit cards can be a part of your lifestyle, allowing you to take advantage of free travel and other perks. I regularly fly for free, or enjoy free nights in a hotel because of my credit card approach.
With the right attitude and planning, it’s possible to use credit cards successfully — without racking up debt and paying thousands of dollars in interest charges.
Here are 3 keys to using credit cards without falling into the debt trap:
1. Stop Digging the Debt Hole
Before you start using credit cards as part of your financial plan, make sure that you are no longer digging the debt hole. The first step is to get your spending under control so that you aren’t living beyond your means. Realize that debt is a symptom of the problem. Get rid of your credit card debt, make sure you aren’t building any more of it. Go at least six months without borrowing to make ends meet.
This doesn’t mean that you have to have your student loans completely paid off, or your mortgage done with early. However, you shouldn’t have any credit card debt or payday loan debt hanging over you when you start, and you should be in a place where you don’t need debt to meet your obligations each month.
2. Have a Plan for Your Spending
Next, make sure you have a plan for your spending. It even makes sense to have a specific plan for the credit cards you use (and the rewards you are trying to focus on).
I have three main credit cards that I use on a regularly basis.
- Business card: Even though I’m a freelancer, I still have business expenses. I use my business card to earn cash back when I buy things for my business or go on trips for business. This helps me keep my business finances separate from my personal finances, and I get cash back.
- SkyMiles card: This is the card I use for everyday purchases and costs. I even pay rent automatically using this card, as well as pay my utilities, Internet and other costs. It’s also the card I use for groceries and gas. I earn miles quickly, and my son and I usually fly free when we travel.
- Upromise card: Finally, this is the card that I use for online purchases. It is the card saved at Amazon and other online retailers. When I order things online, the cash back rewards are automatically deposited into my son’s 529. Even though I contribute regularly each month, the credit card earnings add a nice bump, and the account as a whole benefits from the compound interest.
Each card has a purpose, and my spending is done with my priorities in mind. While I could probably get a little more benefit out of putting everything but my business — including the online purchases — on the same card, I do like the idea of having these things split so that if my saved online card is compromised, it won’t affect my other card, and vice versa.
3. Pay Off the Card Each Month
The reason planning is so important is due to the fact that you need to be able to pay off your credit cards each month. Each of my cards has a plan and a purpose, and they fit within my overall financial plan. I don’t make extra purchases “just for the rewards” or justify over-spending with the rewards.
In order for this plan to work, you have to pay off your credit cards each month in order to avoid interest charges. My income (what doesn’t go toward retirement contributions and other long-term goals) sits in a money market account, earning interest for the month. When it’s time to pay the bill, I can do so and avoid interest.
If you don’t track your spending, or don’t have a plan for your money so that you live within your means, this won’t work, and you should probably rethink using credit cards.