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Key takeaways
- Pay your balance on time and in full each month to avoid interest and reduce the risk of accumulating debt.
- Save for emergencies so that you have cash on hand and do not have to resort to using your credit card or taking out a credit card cash advance.
- Establish a budget and spend within your means. Tracking expenses and setting limits on your spending can prevent overspending.
Credit cards are extremely convenient. They let you shop without cash and earn rewards at the same time. But if not used wisely, they can lead you into a debt spiral all too easily. A staggering 61% of Americans have fallen into this trap owing an average of $5,875 in credit card debt. The good news is you can avoid credit card debt.
The trick is to learn how to avoid credit card debt while reaping their benefits. We’ll go over 8 strategies below to keep you out of credit card debt.
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Understand Your Credit Card Terms
One of the key ways to avoid credit card debt is to understand potential fees and interest payments. Before you start swiping your card, take the time to read the fine print and familiarize yourself with your credit card agreement.
This is where you’ll find out your interest rates, when your grace period ends, and any fees you may be charged like late payment penalties. Understanding your terms can help you avoid unexpected fees, keep track of payments, and stay out of debt.
Exact terms vary by card, so choose one that fits with your spending habits, financial goals, and budget.
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Save for Emergencies
Unforeseen expenses can derail even the best financial plans. Say your car breaks down and you don’t have cash on hand to pay for the repairs. The logical thing to do is use your credit card. The problem arises if you can’t pay your bill on time. You may be charged a high interest rate on your balance and find yourself in credit card debt.
How to avoid credit card debt from unexpected expenses? Build an emergency fund that can cover at least six months of living expenses. A rainy day fund will cushion you against life’s unpredictable moments so you don’t have to resort to swiping your card.
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Avoid Credit Card Cash Advances
Credit card cash advances are a debt trap with high fees and interest rates that accrue immediately, without a grace period. Avoid using your credit card to withdraw cash unless it’s an absolute emergency, and even then, be aware of the terms and plan to repay it as quickly as possible.
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Spend Within Your Means
If you want to avoid credit card debt, then live within your means. Credit cards often create the illusion of free money since you get to buy now and pay later. But if you can’t afford to pay for the purchase with cash, you won’t be able to pay your balance at the end of the month. Missing just one minimum payment can make it hard to catch up. Even if you manage to pay the minimum, you will still end up paying sky-high interest rates on the rest of your balance.
To stay out of credit card debt, set a realistic budget based on your income and necessary expenses. Be sure to give yourself some fun money to do with what you like. This wiggle room will help you stick to your budget. Then, before you make a purchase, ask yourself if you can afford to pay for it in cash. If the answer is no, then don’t buy it.
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Pay Your Balances in Full Each Month
No one wants to accumulate interest, so make a habit of paying off your credit card balance in full each month. By doing this, you’re not only avoiding interest but also reinforcing responsible spending habits. A lot of times it’s the interest rates that make credit cards hard to pay off, not what you purchased.
Set reminders or automate payments to ensure you never miss a due date. Starting each month with a zero balance eliminates the risk of credit card debt.
Always Pay on Time
One of the best ways to avoid credit card debt is to stay on track with your payments. Late payments can result in costly fees – up to $29 for a first missed payment – and higher interest rates, in addition to credit score damage.
The more payments you miss, the harder it is to catch up. Automate your payments or set monthly alarms so you never miss a due date. Even paying the minimum is better than paying late, but remember, the goal is to pay in full and on time.
Maintain a Low Utilization Ratio
Your credit utilization ratio — the amount of credit you’re using relative to your credit limit — should stay below 30%. High utilization can signal to creditors that you’re overly reliant on credit and lower your credit score.
It can also make it harder for you to pay your balances on time and in full, causing you to accumulate credit card debt. Regularly monitor your balances and spread your purchases across different cards if necessary.
Don’t Open Too Many Accounts
While it can be tempting to open multiple accounts for various rewards and benefits, doing so can make it harder to keep track of spending and payments. Try to only have two or three credit cards open at a time.
Each credit application will ding your credit score slightly. Choose what cards you apply for based on your specific needs and spending habits. Maybe you want a travel rewards card or would prefer cash back. Only opening a few credit accounts will make it easier to keep on top of your bills and stay out of credit card debt.
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Final Thoughts
Avoiding credit card debt is about implementing disciplined financial habits and making informed choices. Yes, your financial situation plays a big part, but you have control over what you charge and how you pay it back. Always pay as much as you can on time because racking up credit card debt can really set you back. Your credit score will suffer, you’ll accrue interest at a staggering rate, and you will have a hard time qualifying for the best loans or rewards credit cards.
Remember credit cards are a tool. They can help you but hurt you too if not used responsibly.
