We are in need of a refresher course when it comes to being a smart credit user. Despite the brutal financial experience after the Great Recession, we are at it again. We have racked a lot of debt once more. It seems like we have forgotten what we went through a decade ago.
But all is not lost. Although economists are saying that we are on the verge of another recession, our economy is still holding out. That means you still have time. Do not be reckless with your use of credit anymore. You have to make your financial position stronger so you can withstand the coming recession. Because no matter what they say, it will happen. It will be delayed, but it will come to pass.
The question is, what can you do to prepare your finances? Do you have to completely give up the use of debt?
The answer is no. you don’t have to stop using debt. On the contrary, you should still keep on using it. But you have to be a smart credit user. It is not as impossible as you think. In fact, we can take some tips from one generation.
The Gen Z (18 to 24 years old in 2019) seems to be using credit like they have been doing it for years. According to a report, despite their active use of credit, Gen Z has a generally prime credit score. This is a sign that they are using credit but they have it under control.
5 rules that a smart credit user should follow
While the report did not reveal what the Gen Z consumer base is doing, it is not hard to figure out how you can be a smart credit user. It is all a matter of taking control of your finances. Because we only end up with a lot of credit problems because we are not careful. It is true that there are causes of debt that is beyond our control, but that does not mean we cannot prepare for it.
If you want to feel more secure about your finances despite your use of credit, you need to follow certain rules. Here are 5 of the rules that will help you become a smart credit user.
Pay in full whenever possible
This is actually the number 1 rule when using credit cards. It will save you a lot of money on interest if you only pay your balance in full before the due date. Creditors usually earn from the finance charges added to the balance that is carried over to the next billing cycle. This is calculated based on the balance and the interest rate of the card. With the high-interest rate alone, you know that this finance charge will be costly.
Fortunately, there is a way to avoid this charge. You just have to pay your dues within the grace period. This is any date between the date of purchase and the due date of the billing where it is included. You should make a habit of paying your credit cards this way to ensure that you will only be paying the amount of what you spent on.
Prepare for big purchases
A smart credit user should not use debt that is more than what they can pay at the end of the month. But if there is a big purchase that you really need to buy, do everything you can to prepare for it. This means you have to be aware of what needs to be replaced or repaired in your home. It is these expenses that will sometimes push you into unnecessary debts. Car repairs, broken appliances – these can make you spend a lot at one time. And these can be anticipated. Cars should undergo yearly maintenance. You need to prepare for these ahead of time.
The same is true for emergency situation. Make sure you save up enough for your emergency fund. That way, if someone gets hurt or needs medical attention, you don’t have to hesitate. You can afford to get them medical help. You do not have to rely on credit. In case you want to use your cards, you can pay for it in full.
Practice self-control and discipline
If you are used to making credit purchases, it can be hard to break the habit. But if you really want to be a smart credit user, you need to learn how to control your spending urges. Not only that, but you should also be more disciplined with how you spend your money. If it is not necessary, hold back on spending. You can use that money to pay off your existing debts or boost your emergency fund.
And when you put aside some money for your credit card bills, do not spend it. Keep it safe so you can pay off your dues in full and avoid the finance charges.
Keep an eye on your finances
Monitoring your financial activities is a great way to detect problems with how you spend. It will also ensure that you are following your budget and keeping up with your financial obligations. Tracking your expenses will keep you updated on your current financial situation. That means you will always make informed decisions. If you have to decide to buy things, you will know, based on facts, if you can afford it or not. It will keep you from overspending and landing in debt.
Be ready with a repayment plan
In case you cannot afford to pay your debt in full at the end of the month, that’s okay. If you really need that purchase, you might want to ensure that you have a repayment plan in place. Because if not, you might end up spending a very long time paying it back. Take the recent holiday spending as an example. Reports revealed that Americans spent an average of $1,325. And based on a survey, 15% of those who racked up holiday debt can only afford to pay the minimum. If you know that you cannot afford to pay your balance in full, make sure you have a repayment plan. Commit to an amount that you can pay towards this debt. Make sure that this is an amount that is higher than the minimum. Otherwise, you will spend a long time paying off the debt and you will spend a lot of money on the interest alone.
Tips for smart credit users
Being a smart credit user is not really that hard. But you have to be committed to making the right choices. It requires consistent effort for you to develop the habits that will improve the way you use credit. It all starts with certain money management tips that will keep your credit use under control.
- Always pay more than the minimum. If you cannot pay your balance in full, at least pay more than the minimum. This will minimize the amount that you have to pay.
- Stay below the limit. The ideal level is 30% of your credit limit. If you know that you are going beyond this limit, keep away from new credit purchases. The more debt you owe, the harder it is to pay off. Not only that, it will have a negative effect on your credit score.
- Never get cash advances. If the interest rate on credit card purchases is high, it is nothing compared to cash advances. The interest is very high and can quickly make your debt spiral out of control.
- Learn to negotiate. If it all becomes too much, do not hesitate to negotiate with your creditors or lenders. This is one of the skills that a smart credit user should do. Know your rights and negotiate your debts so it is easier to pay off.