Owning a credit card can be empowering; you now have a convenient and safe financial vehicle that allows you to purchase more expensive items that you can pay in installments. Not only that, but credit cards are the simplest way for you to build a good credit score, which improves your likelihood of getting approved for a bank loan later, should you ever need one.
However, you should also remember that credit cards are a form of trust between you and the issuing bank. It can become incredibly tempting to use your credit card for all your purchases, which may lead to debt problems in the future. It is crucial that you know how to use your credit card correctly so that you build healthy financial habits and maintain wise spending.
Choose the Right Credit Card For Your Needs
The first step in correctly using a credit card is finding the right one for your needs. Not all credit cards are the same, with some needing a higher annual income to be approved. Similarly, there are credit cards that offer specific perks and privileges when you use that card to pay off certain billers or to purchase items on popular e-commerce sites. Carefully consider how you plan to use your credit card so that you can make a more informed decision on which one is right for you.
Understand What Credit Cards Are
The biggest misconception that many Filipinos have regarding credit cards is that it is “instant money.” When you get approved for a credit card, you will be assigned a credit limit, which is usually five or six figures, depending on what you declare as your annual salary. Some people confuse this limit as an indicator of how much money they have to spend as they please.
While it’s certainly true that the amount is at your disposal, your credit limit refers to the limit of your debt. Credit cards are convenient solutions to pay off more expensive items, such as a car or large appliances, but essentially, they’re a loan that you take from your bank and promise to pay back. These are more like cash advances rather than money that you can freely spend.
Buy Only What You Can Afford
Before you make a big-ticket purchase, look at the monthly amortization rates and see whether you can afford to pay off that amount each month. It’s not a smart decision to max out your credit limit and accrue monthly amortizations that you can’t pay off, as this will make debt repayment difficult.
A good rule of thumb is to make a monthly budget you will strictly follow. Many financial experts tout the 50-30-20 rule, with 50 percent of your salary allocated for your needs, such as housing, food, and utilities; 30 percent for your wants; and 20 percent for savings. If you plan to use your credit card to pay for a purchase, make sure that amount still falls within the budget you have set for that category to avoid overspending.
Remember that having a credit card is a luxury, not a necessity. Don’t allocate half of your budget to your credit card—that is the fastest way to get into debt.
Use One Credit Card For Each Need
If possible, have multiple credit cards for different expenses. This reduces the risk of bills piling up as a result of using the same credit card for all your purchases. Even if you feel you can afford the monthly amortization of a certain purchase, these monthly payments can add up if you have other expenses as well.
Having multiple credit cards can help prevent debt because you know which card to use for which expense. It also teaches you discipline, since it’s an easy way to keep track of what you can spend each month.
If you’re worried that carrying multiple credit cards in your wallet will tempt you to overspend, leave some, if not all, of them at home. Only bring your “splurge” credit card when going out, and leave the credit card for your car or groceries in a safe place in your room. This will prevent you from using the wrong credit card for unintended expenses.
Keep Yourself Accountable
Financial literacy also covers accountability. It’s not enough that you know which credit card is right for you or how to use it. You also need to stick to your budget. You know yourself best, so create a game plan that will work for you. Whether that’s asking your friends or family to keep you accountable or downloading a budget planning app on your phone, find a way to always pay your monthly credit card dues in full each month.
Credit cards are powerful tools that you can use to make your life more convenient. However, just as with any tool, you need to know how to correctly use it to ensure that you reap the benefits instead of creating further complications for yourself. With smart financial planning and responsible usage, you can use your credit cards to build the life you want without compromising your financial stability.