Credit cards can be a great tool when used wisely. When you avoid overspending on credit you can begin to use credit cards to your advantage. Use those cards right, and the credit card companies will be paying you to borrow money from them. By paying off your cards in full every month, never running a balance, and taking advantage of rewards, you can actually earn money by using your credit cards.
What is the key to staying out of credit card debt? Never borrow more than you can afford to pay back right away. Your credit card purchases should fit into your budget. Plan every purchase and know how you’ll pay for it before you use your credit card. With a solid spending cap in place, your credit card balance won’t grow out of control.
For example, people tend to spend more around the holidays. If you use your credit cards to do holiday shopping, you may not pay off the charges until months later. Make a holiday spending budget before you shop, and if you can, try saving small amounts of money throughout the year in a special holiday gift fund. Using credit cards often leads to impulse spending and overspending, and those items that seemed like such bargains end up costing you 10 to 20 percent more than you thought, due to credit card interest.
Some people use their credit card for nearly all of their expenses and pay off the balance in full at the end of the month. This can help in budgeting and keeping track of where their money goes. If you don’t have the money or the discipline to pay off your balance every month, you should avoid using a credit card for things such as clothing, food, gas, dining out, and other recurring expenses.
Cash advances on credit cards come with huge price tags, including higher interest rates and fees. Cash advances almost always come with a transaction fee of anywhere between 2 and 3 percent of the amount you get. Plus, grace periods don’t apply to cash advances, so you pay interest from the day you get the cash. To add insult to injury, the interest rate on cash advances is significantly higher than the rate on purchases. All in all, your cash advance can end up costing you a bundle of money. Bottom line: Don’t use your credit card like a bank account, and avoid cash advances whenever possible.
Cash Advance Fees
Visa card holders take out a staggering $100 billion a year in cash advances. At an average up-front fee of 4–5 percent, cash advances are generating $3 billion a year to Visa in this type of fee alone.
Credit card companies will often lower your interest rate if you simply ask. Call the company and tell them that you’ve received credit card offers with lower rates and ask if they can lower your rate so you don’t have to switch. If you’ve been a good customer and have been with the company a while, you stand a good chance of getting your rate reduced.