According to the Federal Reserve‡, approximately 191 million American adults have at least one credit card account, half of all Americans have at least two cards and 13% have at least five cards. Understanding how to manage your credit cards – regardless of how many you have – involves more than simply knowing your credit limit or interest rate.
Effectively managing your credit cards can help you better balance your budget, manage debt, pay for large purchases, and reap the benefits and rewards of your cards. Check out the recommended strategies below.
Establish a budget
One fundamental principle in managing your credit cards is to establish a budget that accommodates your spending, allowing you to track your transactions and identify areas where you might be overspending. This approach also helps set boundaries to keep you within budget.
Pay your full credit card balance every month
If you want to avoid paying interest charges, you will need to pay your full credit card balance on time each month, as opposed to only making the minimum payment. This also positively impacts your credit score. To ensure you never miss a due date, try automating your credit card payments from your bank account. This ensures you’re covered and don’t have to think about your upcoming payments.
Strategically use your cards
When you get ready to make a purchase, how do you decide if you want to put the expense on your credit card or debit card?
Your debit card is like paying cash as it immediately deducts the amount from your checking account, so you can only spend what you currently have. On the other hand, your credit card may allow you to spend a higher amount, but you are borrowing the money to pay it back when your bill is due. One important consideration is whether you can pay off your credit card balance in full each month. If you are working with a tight budget, it might be worth it to use your debit card and bank account to ensure you don’t overspend.
Evaluate your rewards
One key benefit of utilizing a credit card is the ability to earn rewards, which may offer cash back, travel points, or exclusive deals that can contribute significantly to your savings. Some credit card reward programs also provide opportunities to earn bonus points for purchases made at a specific retailer or type of merchant, such as gas stations.
Each year, refresh yourself on your credit card reward programs and how many points you currently have, as you might have travel points or cash back you can use. Keeping track of these programs will help you maximize rewards, just be sure to stick with your budget to avoid unnecessary spending. Stay on top of these programs so you can get the most of your cards, however, ensure these benefits do not tempt you into unnecessary spending, as this can lead to accumulating high-interest debt.
When to use a credit card or emergency savings
Another factor to consider when making a purchase is if you should use your credit card or tap into your emergency savings. Your emergency savings should be money you have set aside for an unexpected expense or a worst-case scenario situation. Your credit card should be used for expenses you know you can pay off when the bill comes in a month.
Understanding how to use credit cards to maximize your budget is a key tactic in setting yourself up for financial wellness.
For more educational insight on credit cards, visit the UMB Financial Education Center and our course on credit cards.
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