Use credit with common sense

Even the most careful shopper with a credit card can suddenly find him or herself with too much debt.

Whether it be holiday shopping, impulse shopping, too much weekend shopping or falling behind on payments, credit card debt has the possibility of creeping up on you.

First, remember good old common sense is the best way to use credit cards. If you don’t need the item, don’t buy it. Start by examining the terms of the card or loan you are currently using. Always keep a record of all of your cards, the balance, and the interest rate.

As you use your credit cards, keep the following in mind to learn how to control and stop increasing your credit card debt.

Have an emergency fund

  • One reason people use a credit card is they couldn’t make the purchase with cash. Start each month with a little money transferred into a special savings account. When the balance in that account gets larger each month, you now have the extra money to make emergency purchases such as an auto repair or a medical expense. Adding to the fund every month will help you avoid using the credit card when the inevitable emergency occurs.

Borrow, charge only what you can afford

  • One of the worst things you can do is to make purchases of items you just can’t afford. Getting the sudden impulse to purchase “that must have” electronic item or something else needs to be resisted. Too many of these purchase will overtake your monthly budget. The best policy always is: if you can’t afford it with cash or a long-term debt payment plan that can be comfortably worked into your monthly budget, don’t make the purchase.

Understand your loan and credit card terms

  • Knowledge, of course, is power. Read through your credit card and loan agreements and make sure you understand how interest will be applied to your account. Make sure you know these answers: When will you be charged a fee?  When is the payment due? How is the interest calculated? What will cause your interest rate to go up? Knowing the answer to these and other questions can help you avoid debt because you’ll understand how much your card is actually costing you.

 Limit your number of credit cards

  • More credit cards equal a higher chance to dig yourself into more debt. Self control always helps, but having more options to charge a purchase is too tempting. The less temptations the better. Time to cut up some of those cards and relieve the pressure on your wallet.

Snowball your debts

  • When you’re paying down those debts, a method to consider is snowballing. First, determine your debts by largest to smallest. Make the largest payments each month on the smallest sized debts. Make minimum payments on the others. This method allows you to be successful by paying off a manageable account first so you will see your progress and know you are taking control of your debt. When the smallest account is paid, move to the next smallest and so on.

Avalanche your debts

  • Another method is to avalanche your debt. Determine your debts with the highest interest rates and pay those down first. Mathematically speaking, the avalanche method is a great approach since you will pay less interest over time and thus get out of debt faster.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

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