This is a post by Mayank Malik. Mayank writes on money, cars, sports and all things dad-related.
In the last post, I talked about how to choose the right credit card for you and your family. Today, let’s look at managing those credit cards. With the unmatched convenience that cards bring into our life they also bring the perils of debt. Credit card debt can be a scary thing and extremely difficult to get rid off.
So, how do you avoid this debt trap without having to do away with the convenience of a credit card? Here are a few money management tips that we keep in mind to help our family remain debt free early in life.
Create a Monthly Budget
My first recommendation to you is to create a monthly budget with heads like Rent/Mortgage, Household Expenses, Fuel, Entertainment, Shopping, Estimated Travel and Medical Expenses, among others. Ideally, you should deduct 10 %( more the better) from your income and then create your budget for the month/quarter. The 10% should be stashed away as savings/emergency fund at the start of the month. This is a great tool to get to what I call ‘cash in hand’, much like a business would have.
For instance, if you earn $10,000 a month then your ‘cash in hand’ is $9000 and the $1000 should go in a separate savings /checking account or just put it aside in an envelope in your closet. Spend on your credit card keeping this budget in mind.
Stick to Your Budget
Ensure that your overall budget is ‘met’ at the end of the month or break it down into a weekly or a fortnightly budget. So, if you shop more than what you set out to at the beginning of the month then cut down on your Entertainment expenses. In other words, don’t worry if you exceed your budget on any individual head but compensate it with spending less on another.
Do Not Chase Those Rewards
If you hold a credit card with a good rewards program or a cash back program then don’t end up spending more than the reward itself is worth. Stick to your needs and minimize your wants.
Balance Transfer Credit Cards
Remember the money-spinning balance transfer rates will not last forever. Six months is the norm now. The “normal” rate will return sooner than you think, so use the interest-free period to uncompromisingly pay down any built up balances.
Pay Your Balance in Full Each Month
If you follow your budget then this is a given. Following a budget will ensure you will never carry a balance. It is difficult to stick to your budget 12 months in a year. Give yourself a pat on your back if you can do it for 9-10 months in a year.
Say No to Cash Advances
Cash advances are one of the worst ways to use your credit card. The astronomical interest rates will hit you hard. If you have to use your credit card to get cash, then you need to think hard about an emergency fund. Rework your budget and create an emergency fund NOW.
Less is More
The more credit cards you have, the more the likelihood that you will charge on them. In addition, it is extremely difficult to manage multiple accounts and remember “pay by” dates for all of them. Another benefit of limiting your credit cards is that you accrue more rewards/miles since most of your charges are on one or two cards. The more you spend with a single card company & strengthen your association with them helps you while negotiating for one time waivers of late fees and similar benefits.
How do you avoid & manage your credit card debt?
Photo Credit: Wonderlane