Sticking to a simple rule could save you a lot of time.
- Credit cards offer benefits like cash back on purchases.
- But if you lose money due to interest charges, you will void those benefits.
- Set a spending limit and create a budget to avoid paying interest on your credit cards.
Credit cards tend to get a bad rap. And some financial experts, like Dave Ramsey, insist that they should be avoided at all costs.
But the reality is that credit cards can do a lot of good things for you. First, they tend to reward consumers for making purchases in the form of cash back. Second, they can come with money-saving perks like free checked bags on flights (a perk you’ll typically find with a travel rewards card).
Plus, credit cards can help you build credit. If you pay your bills on time, that positive activity will show up on your credit report, which could lead to a higher credit score. And the higher that number is, generally, the less expensive it is for you to borrow.
But while credit cards can work to the benefit of consumers, they have a major drawback. If you don’t pay your balance in full by the due date, you’ll risk accruing interest on your purchases—interest that costs you money.
However, the good news is that it is possible to use credit cards regularly without paying a dime in interest. All you need to do is this one thing.
Set your own spending limit
When you get a credit card, it will usually come with a spending limit based on a formula that your issuer will use. That formula will take into account factors like your income and your credit score.
But the spending limit you get on your credit cards may not be the spending limit your monthly paycheck can support. So if you want to avoid a scenario where you’ve built up a balance you can’t pay off in full, run through a few numbers to see how much you can charge each month on your credit cards.
You may have three separate credit cards, each with a limit of $2,500. But that doesn’t mean you can pay $7,500 in fees each month. Heck, you may not even be able to afford to max just one of those three cards. So instead of relying on your credit card spending limits, set your own.
budget will help
The best way to see how much you can charge on your credit cards is to set a budget. Once you’ve accounted for expenses like rent and car payments, which are usually debited from your checking account, you’ll see how much you can spend on other bills, whether it’s cable, groceries, or social activities. That should help you set a spending limit that allows you to pay off your credit card balances in full each month, thereby avoiding interest charges.
Another good bet? Give yourself a reserve for unplanned bills. You might do the math and find that you can change $2,000 in credit card charges per month without having to carry a balance. But you may want to cut $200 or $300 off that limit to have a cushion for unexpected things like higher-than-anticipated car repairs or utility bills.
Paying interest on your credit cards is essentially throwing money away. But if you’re careful about setting a spending limit for yourself, you could benefit from credit cards for years without paying any interest on your purchases.
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