How to Handle Credit Cards

As of the end of 2008, US consumers had an average of 5.4 credit cards. At that time, Americans held $972.73 billion of credit card debt. The US population is approximately 304 million, so that's approximately $3200 of credit card debt per American, but many Americans (~23%) aren't even old enough to carry credit cards, some people simply don't want or need credit cards, and some people who have credit cards have no credit card debt at all. We should all be in one of these last two groups, and the goal of this post is to show how that is possible.

Who needs credit cards?

Not everyone needs to own or use a credit card. If you don't feel like you could control your spending with plastic in your pocket, or if past experience has proven that you can't, you may not be ready for a credit card yet. Having said that, I believe that credit cards can be very useful and can be good for most everyone.

Credit cards make tracking your expenses much easier, and free you from having to carry cash around with you. You can always have exact change. Many cards allow you to earn rewards. Wise use of credit cards can help improve your credit score, which is very important if you hope to buy a house at some point.

What card to get

There are way too many options, so here are some things to look for.

Interest Rate

This can be the least and most important aspect to look for. If you use your card correctly, you will never deal with the interest rate. However, you should be aware of the interest rate before you sign up for a credit card. Interest generally range from 12% - 18% APR.

Grace Period

The grace period is the amount of time you have to pay off the balance on your card before you begin to accrue interest. The average grace period is between 20 - 25 days. Generally, more time is better, but if you are paying attention, 20 days should be plenty of time to pay off your balance.

Membership fee

Avoid membership fees. In some cases, membership fees are a good idea, but I want to show how to use a credit card without paying a cent to the credit card companies. Why should you have to pay to spend money?

Get rewards

Even without paying a membership fee, you can get a credit card that will give you rewards like cash back. You usually get more rewards for purchases on things like groceries and gas (3-5%), and a smaller amount for other purchases (1-3%).

Check reviews

Some credit card companies are more ruthless and less friendly than others. Their current and former customers will let you know which type they are.

How to use a credit card

Don't use it as debt

If you have to get a loan to buy a TV, purse, or even candy bar, you are better off without it. Don't ever carry a balance that you can't pay off from your checking account that same day. I would say, don't even get close, but that's just my rule.

Pay off the whole balance every month

On top of the ridiculously high interest rates, if you don't pay off your entire balance, most cards have fees, and will charge you interest for the next month's balance, even if you do pay it off on time. Pay attention and make sure you pay that thing off before the grace period is up.

How to get out of credit card debt

Unfortunately, the only really good way to get out of credit card debt is to pay it off slowly, by consistently spending less than you make, and using much of the excess to pay down your debt. Most of the commercials that claim to help you reduce your debt are scams, so be careful. The best way to pay it off is to have a plan. There are several sites online that offer free debt reduction calculators to help you plan your monthly payments, so you can eliminate your debt. Some of the better tools I've found are at CNN Money's Calculator and powerpay.org. More to come on this subject later.

If you have any other tips about how to use credit cards or reduce credit card debt, please leave them in the comments.


Photo credit: forutnewatch.com