How savvy credit card users stay out of debt

For many of you, a credit card is a great tool that can get you out of a tough financial spot from time to time, or help you purchase an item early when you otherwise would have had to wait. But before you know it, little expenses here and there can leave you well in the red and struggling with debt.

In 2015, over half of New Zealanders were in some form of debt. It shows that even the most well-calculated repayment strategies can fall victim to common traps and pitfalls. Fortunately, there are a number of easy ways to reap the benefits of a credit card while staying out of debt as outlined below.

Use a budgeting app

Budgeting doesn’t sound difficult. You simply ‘spend less than you earn’, right? Unfortunately, this doesn’t always go to plan. Especially when emergencies arise. Using a budgeting app like Mint, Wally, or Every Dollar can help you build a monthly budget and stick to it.

Alerts, reminders and regular budget snapshots will help you spend within your means.

Pay your balance in full (or more than once a month)

The easiest way to avoid becoming overwhelmed with credit card debt is to pay your balance in full each month. This saves you from incurring interest, as you are never carrying a balance. To do this, you will need to spend only what you can afford to pay back each month. It will also help you to build a better credit score.

If this isn’t a realistic approach for you, then instead aim to make multiple repayments. Or at the very least, exceed the minimum monthly repayment. The spiral into debt starts when you are only able to meet the minimum repayment, as you are only paying off a small percentage of the balance. The rest will be going to fees and interest. This one step forward, two steps back feeling can soon become stressful.

Build an emergency fund

Emergencies are a major contributing factor to the accumulation of credit card debt. When something goes wrong, a credit card provides a fast, easy way to pay for it. Especially if you don’t have access to any savings.

Building an emergency fund provides the same cash availability, but without the interest. Aim to build at least three to six months worth of income in your emergency fund for the ultimate peace of mind. This will prevent you from putting these expenses on your card.

Avoid cash advances

Cash advances are one of the worst uses of your credit card. Not only do they cost you a lot in fees, they also incur high interest rates that are charged from the moment the cash is withdrawn. Sticking to your monthly budget and relying on an emergency fund for those unexpected expenses will help you to avoid withdrawing money from your credit card.

Limit your number of credit cards

The more credit cards you have, the more debt you can get yourself in to. No matter how good your self-control is, it is better to avoid the temptation and limit the number of credit cards you have at any given time.

If you already have multiple cards and would like to cut back, there are a number of options. The Debt Snowball method of repaying your debts is one fast, effective approach. Looking into consolidating your debts is another, as you can combine all of your repayments into one, low interest loan.

You might also want to consider a balance transfer credit card. This allows you to transfer the balance of your existing cards to another credit card that has a much lower interest rate. Some providers even offer zero interest on balance transfers for a set period of time, usually between six and twelve months.

This approach will allow you to pay off your balance, without losing money to high interest rates.

In conclusion:

When used appropriately, a credit card can serve as an important financial tool in your toolbelt. But learning how best to use your new plastic so that you don’t spend beyond your means is an important step that many Kiwis forget. By sticking to your budget, building out your emergency fund, and avoiding cash advances, you will be able to maximise the positives while avoiding unnecessary debt, high interest rates, and fees.