The use of credit cards is a customary way of borrowing and spending money for most Americans. Although they get a bad rap, paying with credit cards has numerous benefits when done properly.
If you pay your balance in full every month, they can help improve your credit score, give you valuable perks, protect your purchases, and earn rewards on things you would have bought anyway.
The problem is two out of every three credit card accounts carry a balance and pay interest on their credit card debt. Revolving credit hit an all-time record in February 2020 ($1.097 trillion).
Follow these tips to keep your credit card bills under control. If credit card debt has already become a problem, learn how to stop accumulating it and get rid of it quickly.
7 Tips to avoid credit card debt
Don’t carry a credit card balance
It may sound trite, but the best way to avoid credit card debt is not to accrue any in the first place, which means paying off your balance in full every month.
When you carry over a balance on revolving credit, you’re essentially using your credit card as a high-interest loan. If you need to finance a large purchase that will take months to pay off, take out a personal loan instead. You’ll probably be able to secure a personal loan with a lower APR that will cost you less in the long run.
Ideally, you should never use your credit card to make a purchase that you can’t afford to pay off by the end of the month. Of course, if you find yourself in a true crisis and have no other way to get money, charge a credit card if you must. If this happens, however, commit to not use the card again until you’ve paid off the balance in full!
Don’t use your credit card to give yourself a loan. Only use it for purchases you can afford with the money in your bank account. You can still enjoy all the rewards and benefits of the best credit cards without accruing any debt.
Stick to a budget
This tip follows right on the heels of the first one. Credit cards are obviously a substitute for cash, but you’ve got to treat them like the real thing. If you burn through the money in your bank account, that’s it! Don’t think about your credit card bill due date being far off and presume you’ll have or will get the money to pay it off before then.
Sit down and calculate how much disposable income you really have each month after paying essential expenses and basic necessities, such as food and mortgage or rent payments, and savings and retirement contributions. Whatever is left over after those obligations have been met is disposable income, and it’s the limit for anything extra that you want to buy. Cultivate smart, responsible spending habits by only buying what you can afford, and don’t make impulse buys.
Build an emergency fund
Bad surprises are no fun, but they’re a part of life. You suddenly need to shell out for a new alternator, water heater, emergency root canal, or in some cases–worse. In fact, most credit card debt is the result of expensive emergencies, not frivolous spending.
Planning for the unexpected by building up a healthy emergency fund is a sage and important way to avoid credit card debt. Ideally, your emergency savings should hold about 6 months’ worth of living expenses. This way, if you find yourself unemployed or with major expenses you weren’t counting on, you won’t be forced to use credit cards to pay your bills. Instead, you can tap into the safety net you’ve set aside–that’s what it’s there for.
Need help setting a budget and figuring out how much to put away each month to build your emergency savings? These money management tools can help.
Limit your number of credit cards
There are a few reasons why you should keep the number of credit cards in your name to a minimum, and preempting credit card debt is one of them. That’s because acquiring more credit cards raises your total credit limit, and therefore possibly your debt-to-limit ratio as well, if you end up using it. It can be harder to see how deep in debt you’re getting when that debt is spread out among several credit card balances. And even if you have Herculean self-control, there’s no reason to tempt fate with a high credit ceiling.
Ideally, you should never actively use more than one or two credit cards at a given time. That being said, closing out credit cards can hurt your credit score since it can impact your credit utilization ratio, so don’t just start canceling them willy-nilly.
If you own credit cards you don’t use, check to make sure they aren’t charging you an annual fee. Otherwise, tuck them away in a drawer or personal safe. If a card has an annual fee and you don’t intend to use it, call the credit card issuer and ask if they might consider waiving the fee. If not, it may be best to cancel the card, but pay off your balances first to avoid a ding to your credit score, and don’t forget to redeem unused rewards and points!
Avoid cash advances
A cash advance may seem like straightforward, easy money you’d be forgiven for taking when you’re in a tight spot, but you’ll want to rethink that view. Cash advances are one of the most expensive and risky offers credit card companies extend to try to entice consumers.
Using a credit card to get cash results in a higher interest rate on the advance amount, transaction fees of 3-5%, and no grace period. This means you’ll begin accumulating interest on the money advance the day you take it, even if you pay your credit card balance in full at the end of the month.
Taking out a cash advance often signals desperation and serious financial trouble and may lead you down a path into unmanageable credit card debt. If you need cash, plan to withdraw some when you do your regular banking or go to an ATM. Never use credit cards to get cash.
Read your credit card agreement
Credit card terms contain important information about interest rates, late fees, default rates, and more. Credit card companies make money off fees and high interest rates from consumers who are uninformed or fail to pay on time. Take the time to read the fine print and understand your credit card terms.
Maintain a good credit score
A healthy credit score means greater financial flexibility and freedom, and comes with myriad benefits. With all of that sway, you decrease your reliance on credit cards in the first place. Do your best to maintain a pristine credit report, and you’ll more easily lead a credit card debt-free life.
How to eliminate credit card debt
If you’re already in credit card debt and want to get out, there are practical and achievable ways to do it.
Cut yourself off, for now
Yes, it might be hard, but if you want to regain command of your finances, don’t touch your credit card again until the balance is zero. Use a debit card or cash for daily expenditures. If you decide to resume using credit cards once you’ve eliminated your debt, make sure you pay them off completely at the end of each month.
Always make more than the minimum payment
If you’re unsure how much money to put towards your credit card payment every month, here’s a pro tip to simplify the process:
Take a look at the bottom right of your credit card statement, and you’ll see a federally-mandated box telling you how long it will take you to get out of debt.
The box includes two sections. The first shows how long it will take if you make only the minimum payment. The second shows what you’ll have to pay per month to get out of credit card debt in three years. Pay at least this amount–or as close to it as you can get–and avoid paying interest on your debt for years or decades.
Transfer your balance
If your credit card debt is spread out across multiple different credit cards, consider consolidating them onto a single card. Grab your lowest-interest credit card and use it to pay off the rest of your debts.
Alternatively, if you have good enough credit to qualify, you may be able to sidestep interest altogether. Many credit cards offer a 0% interest introductory period. As long as you pay off your debt within the introductory period, you’ll owe no interest at all.
However, you should only take this route if you’re able to pay off your credit card debt within the introductory period — usually around 6 months. That’s because after the grace period ends, the card’s interest rate will skyrocket.
And be sure to find out whether your credit cards charge balance transfer fees. You should only transfer your balance if you’ll save more in interest than you’ll lose in fees.
Consolidate your debts
An installment loan with a low APR is another great way to consolidate high-interest credit card debt. Simply borrow enough to pay off all your credit accounts in one fell swoop, and trade your debts for a single easy monthly payment.
These debt consolidation loans are a popular way to reduce interest expenses and establish a structured plan to get out of debt. And it won’t just save you money — it’ll also provide peace of mind. Streamlining your debt into a single payment can make the process simpler and less intimidating, improving your odds of staying on top of your payments.
Get help if you need it
If your card balances and interest payments are getting out of hand, it’s time to consider your options before you end up with a monster debt snowball and no foreseeable way to repay it.
First, try negotiating directly with your credit card company. You may be eligible for a loss mitigation program (also called a hardship program or forbearance). If your credit card company agrees to it, they may let you postpone some payments, or lower your interest rate until your balance is repaid in full.
If your creditors are unwilling to negotiate, consider getting professional help through credit counseling. A financial expert can help you look at your finances and come up with a game plan to get things under control or recommend a debt management plan to help you get out of debt.
What is the next step?
Ready to get started? If you’re looking for a credit card with a 0% interest introductory period, you can compare our top recommended credit card companies here.
Or if you’d rather consolidate your debt with a loan, check out these reputable lenders.
Past the point of no return, and need an expert’s help in getting back on track? Compare debt settlement firms here.
Lara is a personal finance writer that enjoys helping people live a balanced life. She covers the essentials — think budgeting and healthcare — and the finer things in life, such as food, travel, and design. In her free time, she enjoys reading, climbing, and cooking up globe-spanning fare for her favorite people.