Welcome to Personal Finance Insider, a biweekly newsletter that connects you with the stories, strategies, and tips you need to be better with money.
Here’s what: My 3 rules for avoiding credit-card debt
After reducing credit-card usage and focusing on paying off debt in 2020, Americans are back to regularly spending on travel, leisure, and dining out. And many are on the hunt for credit cards that reward them for it.
I get it. I charge everything except my rent to my rewards credit cards. Food, shopping, flights, hotels, gas, subscriptions — all of it. And yet, I’ve never had credit-card debt. I’m actually earning some money using credit cards.
So far this year I’ve collected about $285 in rewards points, plus an additional $300 travel credit, using my Chase Sapphire Reserve credit card, and another $272 in cash back using my Amazon Prime Rewards credit card.
Clearly the rewards and benefits that come with these cards can be phenomenal. But they’d be useless if I carried a balance. Credit cards have notoriously high interest rates and the charges would effectively cancel out any rewards.
In order to keep earning as much as possible — and above all, maintain a good credit score — I follow three rules religiously:
- Spend no more than I have in cash. I will never let the current balance on my credit exceed the amount of cash I have between my checking and savings accounts. In other words, I’m certain I have the ability to pay my bill in full every month without relying on my next paycheck. To stay on track, I opt in to text updates that alert me when I’ve hit a certain spending limit.
- Pay on time. This is a huge factor in credit scoring. Every single monthly payment is reported to the credit agencies and can ding your credit score. Plus, any late payment incurs a fee from the issuer.
- Pay in full. I don’t leave any portion of my bill unpaid month after month. Making a payment for less than the total balance is what leads to those ridiculously high interest charges.
I don’t fault people who do have credit-card debt. I know that sometimes a credit card is the only option for quick cash when an emergency crops up. But that’s not always the case. Many of us just aren’t taught how to use credit cards responsibly from the get-go, or don’t fully grasp the consequences of bad habits.
If you’re intrigued by the world of rewards credit cards (or want to make the most of a card you already have), following these rules is a must.
—Tanza Loudenback, Personal Finance Insider correspondent and certified financial planner
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