Don’t Treat Your Card Limit Like It’s Income

Living beyond our means is one of the chief reasons many in society is finding themselves in deep debt. This is also the reason many people view credit cards as the root of all that is evil. The reality is that the credit card account holder’s misunderstanding of their financial situation in relation to the credit cards is the downfall of many.

The most important rule of thumb to remember: Having a $3,000 credit limit on your credit card does not mean you have an extra three grand to live off of during the month. Your credit card limit is never to be treated like it’s your income but unfortunately that is where many people make their mistake and end up ruining their credit. As economic instability makes things even more difficult, people have begun living off of their credit cards to satisfy their basic needs.

For instance, you are short this week for groceries so you go to the store and spend $100 on your credit card to get food you need for a week. Since you don’t have $100 in the bank, you essentially can not afford what you just purchased. When the end of the month comes, it is likely that you will not have $100 then either. Not to mention, when you add in the interest accumulated or if you are late making a payment, the additional expenses in fees and penalties will only leave you deeper in the hole.

So how can you use credit cards to your advantage? Well, there certainly are ways to do so and here is a few things to keep in mind.

#1 – Have it before you spend it.  When you plan to use your credit card for new purchases, you need also to plan to have the amount you spend already in cash. For instance, you want the new comforter on sale for $75. Make sure you have saved that $75 in cash if you plan to use your credit card to make the purchase in order to take advantage of the rewards you may get on the credit card, or if you are purchasing the comforter from an online resource where cash is not accepted. Don’t go and buy the comforter on your credit card for $75 when you only have $20 bucks in the bank.

#2 – Start “enveloping” your money. For every purchase you make on your credit card, stash the cash equivalent into an envelope at home. At the end of the month, when your credit card bill comes in the mail, make a trip to the bank and deposit the cash saved. You can then always be comfortable knowing you can pay the balance in full, on time each month.

#3 – Have a plan.  If you don’t have a spending plan, you need to leave your credit cards at home when you hit the store or go out on the town.

#4 – Start today.  If you are already in credit card debt, you need to get on it and start paying down your debts. It is recommended that you start with the small debts and once you pay off your first one, “snowball” that payment into the next debt. This means if you pay $100 on the smallest balance credit card, pay minimums until you pay it off. When that card is paid, take the $100 and roll it into the next payment on the next credit card. Keep going until your balances are all paid off and then start following step one through 4 to stay on track with your credit and financial plans.

This entry was posted on Thursday, January 22nd, 2009 at 7:28 am and is filed under Debt & Consolidation, Tips & Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.