Using credit cards wisely

Credit cards are part of our everyday lives. Leaving home unburdened by cash is great—and so is getting a free airline ticket or hotel stay, cash back, or other rewards. They’re not only issued by banks – you may also have some from retailers and supermarkets. Credit cards – and their online mobile phone payment equivalents – are easy and convenient to use.

But that convenience has a downside: credit cards or online mobile payments can be the source of debt troubles too. That's why it's important to understand the role of credit cards in your financial life. Here are some tips when using credit cards, online or mobile payment schemes to help you avoid getting into trouble while making the most of their benefits.

1. Pay attention to total monthly debt payments

Many financial advisers suggest that your total monthly debt payments—including mortgage, car/transport loans, student loans, and credit card payments—shouldn't add up to more than one-third of your income. If you are near that level, you might need to pay down other loans or avoid additional credit purchases. Having more debt than you can handle increases the risk of missing payments and increasing the interest burden, which may likely endanger your long-term financial goals, such as saving for your future, purchasing a home or paying for unexpected expenses.

2.  Read those long policy agreements

Not all credit card terms and fees are the same. Some charge annual fees, while others charge fees for balance transfers, cash advances, exceeding your credit limit, or other actions. To keep your fees minimal, choose a card with rates and fee structures that match your expected behaviour. For instance, if you don’t pay off your card in full every month, choose a card with the lowest interest rate you can find. Only if you intend to pay off the balance each (and virtually every) month, consider a credit card with a rewards program, note these normally carry a higher interest rate and/or annual administration fees. 

To decide which card (or cards) may be best for you, you'll need to read and understand the issuer's credit card policy agreement. Look for how and when your interest rate might increase, what actions carry fees (especially not paying the full balance), and, if you travel, how the issuer will charge for transactions outside of your country. If you still have questions, reach out to the issuer as most have resources to help explain the agreement. Do not let the attraction of potential rewards distract from the fees you may pay regularly.

3.  Use cards safely

Credit card fraud and identify theft are major risks. Most cardholders aren't liable for fraudulent charges on their cards, but you still have a responsibility to keep your information safe. 

Be proactive to reduce the risk of fraud by reviewing your monthly credit card statements and checking your account more frequently. Keep your receipts so that you can compare them with your monthly statement and charges. Notify your card issuer immediately if you find any transactions that you don’t recognise. And, of course, report a lost or stolen card immediately. 

Many credit card companies also offer alerts when your card has been used; activate this so that you see each purchase coming through to remind you of what you’re spending money on and to identify any potentially fraudulent charges.

4.  Maximize rewards

Credit card rewards—such as points toward merchandise, airline miles, or access to exclusive clubs—are popular. A card that offers cash rewards may also help you save. If using a credit card for a necessary purchase, it's advantageous to receive cash back if – and only if - you pay the balance in full. This requires discipline but can be worth it.

Many credit card companies allow you to redeem your cash back awards directly to your bank account or offset your outstanding balance. Some credit cards allow you to deposit the rewards into non-traditional savings accounts (for example, to student savings). That way, your credit card purchases may help you accomplish other financial goals.

5.  Pay off balances strategically and always on time

The faster you can pay off any outstanding balances, the less debt will cost you in interest. If you can't pay a card balance in full each month, review your budget to determine how much you can put towards that payment.

You should avoid having too many credit cards as the temptation to spend up to the limits on each can be overwhelming. If you do, making minimum payments on one card can make sense if it's part of a strategy to pay off higher interest rate cards first—which likely will save you money over time. It could also allow you to transfer balances to a lower rate card, especially as part of an introductory offer. Because credit cards typically charge higher rates than other types of debt, it often makes sense to focus on reducing card debt before paying off other loans with extra payments, such as home or vehicle. 

While it is preferable to pay off the full balance, it is always important to continue making at least minimum payments on time on all your debt, to reduce the buildup of further debt (through interest and other charges). Remember that, although you might use credit cards like cash, they are not just a tool for transactions. They can have an impact on your financial goals. Take the time to consider credit cards in the context of your budget, debt picture, and other financial priorities so you can better use credit cards to your advantage.

Other types of loans may be more common where you live (for example, borrowing from banks, family or, worst of all, payday loan vendors). You can apply similar thinking – be clear of what is owed and when, what the interest rate is, and penalties for missing payments. While these usually don’t have rewards, do not be deceived by any offers that are related to them beyond lower costs (interest and/or administration fees).

6. Make it harder to spend

It's nearly impossible to get out of debt if new purchases keep adding to the amount of debt. If you still want to use your credit cards, avoid charging more than you can pay off in one month and always make your payments on time. Consider hiding your cards so you can't keep using them—or just leave them at home when you go out. That can be a little bit easier said than done when shopping on the internet or using electronic systems. 

Some online retailers offer the option of saving your payment information. Decline the option if you have the chance— making it a little more difficult to spend money is often all it takes to skip unnecessary purchases. 

While it may seem to be a step back, using cash for purchases can help reinforce how much things actually cost and what you’re spending. Try it for a limited period and see what impact it has on your spending. Using debit cards is another option to avoid overspending.