5 Tips to Manage Credit Card Spending
If you use a personal credit card for day-to-day shopping and getting cash back, you know that managing your credit card spending is very important.
Credit card debt is among the leading causes of financial distress for U.S. consumers. According to Fox Business, the average American household has more than $16,000 in credit card debt, up 10 percent from 2013. That debt carries a real cost beyond the dollar amount owed. Fortunately, it's well within your power to use credit cards wisely. Here are five tips to help manage your credit card spending.
1. Keep Your Credit Utilization Ratio Low
Your credit utilization ratio describes the relationship between your credit card balances and your aggregate spending limit. For example, a $2,000 balance on a credit card with a $5,000 credit limit equates to a 40 percent credit utilization ratio.
As a rule of thumb, your credit utilization ratio shouldn't exceed 40 percent for very long, if ever. High ratios may adversely impact your credit score — an outcome that can have negative consequences for your financial and personal life.
To be on the safe side, shoot for a 30 percent credit utilization ratio. That gives you some breathing room to cover unexpected expenses, such as emergency car maintenance.
2. Pay Your Credit Card in Full Each Month
The best way to keep your credit utilization ratio low and avoid costly interest charges is to pay your credit card balance in full each month. An effective spend-control strategy involves not spending more than you can comfortably pay down each month — you'll reduce your likelihood of developing persistent credit card debt.
It's permissible to bend this rule in limited circumstances. For instance, if you have existing high-interest credit card debt, it's in your best interest to open a balance transfer credit card with a low- or no-interest teaser rate, transfer the high-interest balance, and pay it down over the course of several months. As long as you pay off the balance before the regular rate kicks in, you'll greatly reduce the cost of carrying the debt.
3. Leverage Rewards to Improve Your Financial Health
If you have a rewards credit card, you might be able to use it to to help improve your financial wellness. If you have a pure cash back credit card, use any cash rewards you receive to put toward your account balance or direct deposit it into a savings account. Alternatively, if you have a rewards points credit card, you can use your rewards to buy discounted gift cards to the stores you know and love—saving on future purchases without having to use your credit card. Or, you may also be able to redeem your reward points for cash redemption to put into savings or towards your account. Just make sure you know when your rewards expire to get the most out of them.
4. Consider Setting a Monthly Spending Limit
This is a more specific approach that takes the "pay your balance in full each month" strategy one step further. Setting a strict monthly spending limit that's well within your budget increases the chances that you'll actually be able to zero out your monthly balance and avoid interest charges.
5. Set up Spending and Security Alerts
If you're worried about controlling your credit card spending, set up customized spending alerts that let you know when you've made an abnormally large payment or exceed a certain balance threshold. Pair these informational alerts with security alerts designed to flag potentially fraudulent spending patterns.
It's important to be mindful of the everyday purchases you make on a credit card. When used wisely, credit cards are tools that can help you make more progress along your financial journey. Sometimes, the best course of action is to take things slow.