Did you know that the average American has at least 3 credit cards in their wallet right now? The average credit card balance per household is almost $16,000 too! The problem is that people, even now, still don't know how to use credit cards efficiently.
Here are five simple ways I have used to keep my credit card balance low and use them in a smarter way.
1. Do not make minimum payment! This is the most important point to make on the topic of credit cards in the history of the world. If you make a minimum payment (usually 2% of balance) on a card which has only $1,000 on it, it would take you over 9 years to repay the balance if it were 0% interest (which it won't be!). If the interest rate was the average of 18%, then it's going to take you almost 30 years to pay it off with minimum payments.
2. Pay off high interest cards first. This is a strategy you would use if you have more than one card. Make minimum payment on all but the highest interest rate card, and pay the rest of your disposable income to clearing the more expensive card. Then move down the cards to the next highest interest rate and continue until your balances are all clear.
3. Transfer your balances. If you can, apply for a low or 0% interest card and transfer as many of your high interest balances to it as possible. This means that any payments you make during the introductory offer will actually be used to clear your balance and won't be wasted on interest.
4. Use a loan to pay off the cards. If you've reached your credit card limit and can't get a new card to balance transfer, another way to pay less is to take out one loan to cover them. One monthly payment at a low interest rate of 6-8% is far cheaper than multiple high interest credit cards of 16-22% and it's also a hell of a lot easier to manage!
5. Cut up old cards. This strategy is extreme, and in all honesty if you need to cut up your credit cards to avoid overspending then you may need to address your understanding of credit cards first to achieve the right mindset, however - cutting up cards can be effective at preventing your motivation from slipping and spending money on the empty cards you've cleared with all the good work in the previous 4 methods.
Even if you are affluent, it is still worthwhile conducting a thorough income and expenditure report which covers every penny you have coming in and every penny you have going out. This is the best way to see weaknesses in your budget that you can address. In fact, people with money can fritter it away much quicker than people who struggle to make ends meet.
Once you know how to use credit cards correctly, they can aid your finances in a positive way by accruing rewards such as airmiles or shopping vouchers. I work with DebtHelpScotland.co.uk in the UK and it is very apparent that credit cards can only work for you if your spending and income are balanced so that you can gain the benefits without the expensive fees, charges and temptation to spend more.
Are you using your credit cards in the right way?