Your credit card use will really put you in a tough financial situation if you keep on abusing it. There are many benefits to using this card as a purchasing tool. It can protect you from fraudulent activities. It is also more convenient compared to carrying cash. This card will allow you to purchase items that are beyond your budget. You just have to pay the money borrowed in installments.
This is the reason why a lot of people apply for credit cards more than the other types of credit like personal loans, mortgage, etc. Of course, the convenience and added purchasing power are what makes this type of credit dangerous. It is easy to abuse the use of these credit cards because it makes other people feel like their wallets have an extension. They do not realize that paying off credit card debts can be so hard.
Fortunately, it is easy to correct the mistakes that you did in the past. You just have to consolidate your debts. This involves opening a new credit account that will be used to pay off your original debts – in this case, it will be your credit card debts. You can get rid of the high-interest rates on the debt and replace it with a lower one. You will be left with one huge debt to pay off each month.
You may be wondering – what happens to your credit cards? How can you be smart with credit card use after you have consolidated the original balance?
Smarter credit card use after debt consolidation
The thing about debt consolidation is that it doesn’t really get rid of your debt situation. It merely simplifies and improves your repayment plan. You still have to start making payments. It will be easier after you consolidate your debts. However, it will also require you to be smarter with your credit card use. You need to learn how to handle your credit cards now that these are back to having zero balances. If you are not careful, the debt relief strategy might not work well enough to help you achieve debt freedom.
So how can you be smarter with credit card use?
Stop using the credit cards
The best way to be smart with your credit cards after the consolidation is to stop using it. Sometimes, consumers feel a false sense of debt freedom after consolidating their debts. You have to remember that you still owe the same amount of money and you still have to pay it back. Do not add to the debt that you currently have. Stick to using cash for the meantime. Once you have completely paid off your balance, or at least a significant part of it, that is the only time when it is okay to continue using your credit cards. Just make sure that you learned your lesson after paying off your debts completely. You should learn to be smart with credit card use so you will not land in the same debt situation again.
Organize the existing credit cards that you own
While you are in the midst of a debt consolidation program, you might want to take a closer look at all your credit cards. Organize them and take note of the perks and rewards system offered by each card. You want to determine which of these cards can be maximized. You want to ensure that you are taking advantage of the freebies that they can offer while you use them for your usual purchases. This will not just help you maximize the perks of the card, it will also help you identify the cards that you do not really need. If there are cards that you do not use regularly, you can keep it in a place where it is not easily accessible.
Do not close the credit card accounts immediately
In case you have a lot of cards that you no longer want to use, do not close the accounts. At least, not yet. 58% of Americans are not aware that closing a credit card will have an effect on their credit score. They think it will improve it. That is not true. If you consolidated your debts using a loan, your score would have gone down by a few points. If you choose to close the credit cards that you just paid off, it will go down further. The credit utilization rate is calculated using the credit limit and balance. All the accounts that you have will be included in this. Ideally, the balance should be 30% of the limit.
Since your balance still needs to be paid off, you need the credit limit of all your credit cards. If you close a card, the limit of that account will no longer be considered in the credit utilization rate. Check if you need a good credit score in the next few months. If you do, then keep your credit cards open. You do not have to use them. After paying off a significant part of your balance through debt consolidation, you can already afford to have a lower credit limit.
How to improve your credit card use after debt freedom
Being smart with credit card use will not stop after you pay it all off. You need to learn how to use it properly if you want to stay away from another debt problem. Here are some tips that you can implement to become a smarter credit cardholder.
Choose what you want to keep
It is okay to own several credit cards – but each one should be used regularly. If there are cards that you do not use a lot, you might want to consider closing these accounts. These will just make you pay more in annual fees and other charges. Not only that, but it will also add to the temptation of using too much credit.
Include credit card use in your budget plan
To be smart with credit card use, you have to make sure that it is included in your budget plan. By consulting your budget, you will know if you can afford an expense or not. This will also allow you to set aside the money that will be used to pay off the card in full when the billing statement comes. This will keep you from overspending and will also help you stay in control of your expenses. It will be less likely that you will land in too much debt.
Have an emergency fund
Usually, people end up with huge amounts of credit card debt because they relied on their cards during emergencies. Considering the high-interest rates of these cards, you should really avoid that. Save up for an emergency fund that you can use. Make sure this fund is big enough – around 6 months worth of your monthly expenses. You can only use your credit card if your emergency fund is already depleted because of a series of unexpected situations. But if not, then keep your card away and stick to using cash to pay for emergencies.
Monitor your credit card use
Being smart with credit card use means you have to monitor it. This does not just mean including it in your budget plan. It also means you have to be diligent in tracking your spending. Set a limit based on what your budget says you can afford. Stick to that limit and do not go beyond it. There are many apps that you can download on your smartphone that will help you track every purchase that you make. This will help you stay away from debt.