The Secret to Credit Cards: Diligence

OK, so you can’t live without your credit cards. We get that. We understand that they can make life easier for those who can manage them effectively, but as evidenced by the increasing number of credit card defaults, that may be easier said than done. Unfortunately, many people are quick to jump on the plastic bandwagon without learning the critical secret to credit cards: Diligence.

If you want to ensure that you don’t meet the same fate as millions of credit card defaulters, you need to know what it is you are using, why you are using it, and how much you really need to use it. Then it is essential to be diligent in your efforts to manage them. Anything less, and you could find yourself spinning into a debt spiral.

What You Need to Watch

Your debt limit: Your debt limit is the amount you could comfortably pay off entirely within six months if you had to. Ultimately, your debt limit shouldn’t be any higher than 20% of your annual income, but that is on the high end. It’s best to set your limit, a specific dollar amount you cannot exceed, and then apply your discipline to stay beneath it.

Minimum monthly payments: It may seem like you’re helping your budget when you make minimum payments, but you could be hurting it in the long run. If you get to the point when you can only make a minimum payment, you have too much credit card debt.

Fees: Fees are a fact of life with credit cards. With some cards you pay an annual fee but those generally offer some form of cash back or other rewards. If you’re not going to use your card enough to generate sufficient cash back to cover the fee, it’s probably not the right card for you. Most of the other fees are associated with your card use, such as over limit and late payments so they can be controlled with proper card management. You should be aware of all potential credit card fees and how to avoid them.

Your score: Your score, which changes monthly based on your credit activity, is reviewed regularly by your credit card issuers, which can then change the terms of the card if they don’t like what they see. Be vigilant of your credit report. You can get one free report a year from the credit reporting companies. It may be worth subscribing to a service that provides monthly updates and credit alerts.

The Bouncing APR: While banks can no longer boost your rates due to your activity at another bank (Universal Default was banned in 2009), they can still raise rates for about any other reason having to do with your activity with them. Watch your APR each month. And be ready to transfer balances to a card with a lower APR.

Managing your credit cards doesn’t have to be a full-time job if you know what to look for and you don’t lose sight of why and how much you are using them. The diligence required to stay on top of them and stay out of trouble can be applied in less than a half hour each month, which is nothing compared to the time you’ll spend trying to unravel a nasty financial mess if you don’t.