Having a credit card is a huge responsibility. Use your credit card wisely and you will receive many financial benefits, such as easy access to additional credit and lower interest rates for financial products. Make numerous mistakes with your credit card and you will be paying for it for years to come.
If this is your first time having a credit card, there are some tips that you should follow to make sure that you are establishing good credit for the future.
Limit Your Spending
Many first time credit card holders make the mistake of not budgeting and treating their credit card like additional cash instead of like a loan that must be repaid with interest. This can lead to overspending and carrying a balance on the credit card. According to a recent article on the Money Wise Blog, consumer debt is at an all-time high and some consumers are worried about how they are going to pay off the debt they have accumulated. Ensuring that you are only charging to the credit card what you will be able to pay off each month greatly reduces the risk that you will run up large credit card balances and suffer the financial consequences that come along with them.
Stay On Top Of Your Credit Information
When holding a credit card, it is very important for you to stay on top of your credit card information. Make sure that you review all of the information about your credit status regularly, including reviewing each of your credit card statements, obtaining your credit reports, and monitoring your credit score. Issues and mistakes with your credit are much easier to fix if they are found quickly and reported to the necessary authorities for correction. Consistent monitoring is also important for preventing fraud from occurring in your name, as fraudulent accounts will appear on your credit history as soon as they are opened.
Choose Credit Cards That Can Be Used Anywhere
While it may be easier to sign up for store-specific credit cards, they can generally only be used at a specific retailer and typically carry a higher interest rate than an unsecured credit card from MasterCard, Visa, Discover or American Express. Even if you receive a discount on your purchase for signing up for the credit card, you will pay more in interest and fees over time than you saved with the discount. Instead of restricting where you can use your credit card, choose a multipurpose credit card that is accepted anywhere you need to make a purchase.
One of the best things that you can do for your future financial security is to establish an emergency fund that can be used in the event that unexpected expenses arise.
Having an emergency fund allows you to handle these small financial emergencies without having to resort to the use of expensive credit or putting off the issue until it snowballs into a bigger deal.
Although having an emergency fund is key to financial stability, many people do not have one, preferring instead to use credit cards in these cases and often carrying a balance and paying interest on the purchase for months before they can pay it off.
If you do not have an emergency fund, here is how you can start one.
Decide How Much To Save In The Emergency Fund
The first step is to decide how much money needs to be in your emergency fund. This amount will vary for different people depending on their financial situation and their current expenses.
The goal should be to have enough money to cover up to six months of your regular expenses in the event that you face a significant period of unemployment or significant medical costs due to an illness or injury. However, an emergency fund that contains at least $1,500 is enough to cover many unexpected incidents.
The goal is to have enough of a safety cushion that you will not have to pull out the credit cards to pay for an unexpected expense.
Make A Savings Plan
After you have determined how much you would like to save in your emergency fund, you will need to make a plan for how to save that amount.
Many employers make it easy for you to save automatically by providing a way for you to deposit your paycheck into multiple accounts. Simply open a savings account to hold your emergency fund and authorize your employer to deposit a portion of your paycheck into it.
It would be good to deposit at least 10% of your after-tax income into this savings account, but adding at least $50 per paycheck will go a long way.
Stay Away From The Emergency Fund Account
Your emergency fund will never grow to the size that it needs to be if you are continuously dipping into it to pay for routine expenses.
Once the money has been deposited into the account, it should remain there until a true emergency arises that you cannot pay for with the money from your paycheck while still paying your other expenses. These financial emergencies include things like paying to repair your car so you can travel back and forth to work, replacing a broken water heater or furnace in your home, or paying medical bills from a hospital or emergency room visit.
Vacations and going out with friends are not good reasons to dip into your emergency fund. The longer you can leave the account alone, the bigger the balance will be when you actually need the funds.
Do you have an emergency fund? Why or why not?
Step One – Identify Spending Trends
The first step in creating a successful budgeting plan is to identify trends in your spending. This allows you to determine where your money is going and whether it is being put to the best use for your financial security. People that have never budgeted before often find that they are wasting a lot more in frivolous spending than they thought and are able to adjust their spending to more reasonable limits once they see the limits in writing on their budget.
The best way to identify trends in your spending is to track your spending for two months and categorize your transactions into spending categories, like home, transportation, utilities, groceries, and so on. This can be tedious to do by hand and there are several companies online that will do this task for you if you provide them with your transaction information. One of the best is the free application available at www.Mint.com, which takes all of the new transactions from your bank accounts and automatically sorts them into spending categories with running totals so you can see how much you are spending throughout the month.
Step Two – Establish Financial Goals
After you have established where your money is going now, it is time to figure out where you would like your money to be going in the future. Establishing financial goals gives you a reason to save more and encourages you along on the path to increasing your net worth. Great goals to aim for include creating an emergency fund, saving for a vacation, saving for a down payment for a car or home, or saving for retirement. Once you have decided on a couple of goals to reach for, it is time for the third and final step.
Step Three – Assign Amounts To Your Spending And Saving Categories
Create your final budget by assigning varying amounts of your after-tax income to the various spending and saving categories you established in the first two steps. The goal is to keep your spending below 90 percent of your income and your savings above 10 percent of your income. It is important to leave some flexibility in the budget to account for weeks where spending in one category is heavier than in other weeks and for minor unexpected expenses that arise. At the end of the day, you will have a budget that can guide your spending and help increase your financial stability for the future.