Credit cards are essential for building credit, but only if you’re smart about how you use them. The best credit cards offer generous welcome bonuses, rewards and added perks that may tempt you to spend more than you can afford. In order to make a credit card cost-effective, it’s crucial to make payments on time and in full to avoid incurring big interest charges.
Below, CNBC Select reviews five tips to follow in order to avoid overspending on your credit card.
1. Only spend what you can afford to pay off right now
When you pay with a credit card, it’s easier to spend more than if you pay with cash since you’re not handing over any physical money. You don’t have to stop and think about whether you have enough in your wallet to cover your bill.
To avoid spending more than you can afford, set some boundaries for yourself. You can turn on alerts so your card issuer will inform you once you’ve hit a certain dollar spending limit, whether that’s $200, $500 or $1,000. You can check your balance daily to make sure you don’t go over a certain amount. It can also be helpful to treat your credit card like a debit card, only spending up to the amount you have in your checking account (although ideally less, as you likely have other bills to pay).
2. Avoid impulse purchases
Also known as the 72-hour rule, avoiding impulse purchases is a great way to prevent overspending. When you scroll through social media, you may see ads for apparel or merchandise that tempt you to click and buy something on a whim. These ads are banking on impulse purchases, which can come at your downfall if you purchase things you don’t need — and can’t afford.
Before purchasing an item from an ad or promotional offer, consider whether you really need it or just want it in the moment, and if you have the money to pay for it. If the item falls within your budget, still wait 72 hours before completing the purchase. Save the item in a note or bookmark it and wait to see if you remember after three days. In some cases, you may forget about it altogether, thus saving you money.
3. Start tracking your spending
Tracking your spending can help you better understand where your money goes each month. Once you know how you spend, you can create a budget that lists all your fixed expenses, such as rent/mortgage, cell phone, groceries and savings. Then you can see how much money you have leftover for flexible expenses, such as restaurants, clothing and entertainment costs.
This budget should then help you understand how much money you can afford to spend each month, so you don’t overspend. For example, if you calculated that you have $500 leftover for various unfixed expenses, you can divide that up however you want. That may be $200 for dining out, $100 for clothing, $150 for entertainment and $50 for random purchases. Regardless how you divvy the money, this helps provide guidelines for how much you can afford to spend on non-essential items…Read more>>