Credit Cards

Convenient spending tool or the biggest cause of your money woes?

A lot of credit card users fall into one of two camps: they either believe, with an almost anal-retentive obsession, that credit cards are for emergencies only; or they believe, with an equally anal-retentive obsession, in charging every purchase, right down to a stick of gum, to rack up rewards points and other goodies.

So which strategy is best? Actually, it doesn't really matter, as long as you obey the number one rule - that is to say, the only rule - to owning a credit card: no matter what you do, no matter how much you owe, always pay off your card's balance in full every month. With the average credit card interest rate hovering around 19.5 percent, to do otherwise could spell financial disaster for you over the long term.

Of course, no financial advisor would tell you to eschew credit cards entirely. Making regular, manageable purchases and then paying off the bill when it comes due is an excellent way to strengthen your credit rating Credit cards can also be extremely convenient, especially when it comes to booking flights or hotel rooms, or shopping online.

Still, the temptation is to spend more on purchases when we've got plastic in hand. There's a sense that credit money is free money - or at least money that's going to be paid back by someone else, i.e. your future self. Having this mentality has led many Americans into some serious trouble. According to statistics from the Federal Reserve, about 7 percent of American households currently owe more than $10,000 in credit card debt, and 2 percent owe more than $20,000.

So, how do I protect myself from credit card pitfalls?

To reiterate, you absolutely should pay your credit card bill off in full every month. This is the golden rule. As well, here are some other helpful tips:

  • Limit yourself to one credit card if you can, or three at the most. Any more than that and you may find yourself falling into a spiral of revolving debt - i.e. using one credit card to pay off another.
  • Familiarize yourself with the sneaky tricks credit card companies use that end up costing you more money.
  • Make sure to factor credit card purchases into the current month's budget, not the next month's.

If you find your credit card debt has swelled out of control, talk to your bank about rolling it into your mortgage, which carries a much lower interest rate.

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