Credit card debt is extremely expensive. If you carry a balance on a credit card, you'll pay a fortune in interest and it could take you years to repay what you've charged.
Because credit card debt is so costly, the only way you'll ever get ahead financially is to commit to never carry a balance. This doesn't mean you need to give up using credit cards for good. In fact, if you do, you'll miss out on credit card rewards and on the chance to build credit. But, it does mean you need to only use credit cards responsibly.
Not sure how to do that? Here are five steps to follow if you want to stay out of credit card debt for good.
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1. Live on a budget
The only way to stay out of credit card debt is to live within your means. If you have more expenses than income, it's inevitable you'll end up reaching for your credit cards to make up for the shortfall.
Your budget doesn't have to be extremely detailed -- although it can be. You can use an 50-30-20 budget to cap spending on needs to 50% and wants to 30% of your income while saving the remaining 20%. Then, the key is to just make sure your credit card spending never exceeds the amount of money you allocated.
If living on a budget with broad categories still leaves you with a credit card balance you can't pay each month, you'll need a much more detailed budget. You can allocate a certain amount of money to each type of spending you do. This would mean setting a monthly limit for food, transportation, clothing, eating out, and entertainment. Make sure the total amount of spending and saving doesn't exceed your income.
If your projected spending and saving add up to more than you make, revise the budget and drop spending on unnecessary items until the numbers line up.
2. Set yourself a credit limit
To make sure you can pay off your credit card every month, set yourself a spending limit equal to the amount you've budgeted for everything you'll charge.
If you charge groceries, gas, clothing, entertainment, and eating out, add up your budgeted amount for everything you'll put on your card and that's your spending limit for the month.
Once your credit card balance hits that amount, stop using your card for the month. If you pay cash for something you'd planned to charge, subtract that amount from your self-imposed credit limit.
3. Track your spending
You'll need to make sure you don't exceed the credit card limit you set for yourself or you'll find yourself with a balance you can't pay off.
The easiest way to do this is to sign into your online credit card account on a regular basis. You can see what your charges add up to so you can stop charging stuff if you're getting near your self-imposed credit limit.
You can also use apps to track spending and can often set up alerts once you exceed a certain amount. This is a more hands-off approach and if you're really trying to watch your money, it may not be as effective as monitoring spending yourself.
If you don't want to worry about tracking every purchase and hitting your credit limit, your other option is to make payments on your card as you charge things. If you set up online payments, you can typically pay your card as often as you like. Sign into your credit card account every few days and pay your outstanding balance, returning the balance to $0. If you don't have the money to pay off what you owe, it's time to stop spending.
4. Build an emergency fund
Even if you're able to stick to your budget and keep your credit card spending within limits you impose, you could still find yourself in credit card debt. This could happen if you have an unexpected emergency.
Emergencies are inevitable. They happen to everyone, but most people don't set aside enough money to deal with them. If you have an unexpected emergency, such as a car that needs repair, you'll probably end up charging the costs if you have no emergency fund. Once you do this, it can be hard to get the debt paid off and get caught up.
To avoid this outcome, you need an emergency fund. Your emergency fund should be accessible in a savings account and will ideally cover four to six months of living expenses. If you can't get to that point quickly, save at least $1,000 to $2,500 as a mini emergency fund. If you have this much, you can cover most minor emergencies without turning to your cards and ending up in debt.
If you use your emergency fund money, prioritize building it back up ASAP. And if you started with a mini emergency fund, keep working on saving a full one. If something bad happens, such as losing your job and going a few months without work, you'll need that bigger emergency fund to keep you from eventually ending up in credit card debt.
5. Automate your payments
Finally, to make sure you pay off your credit card bill in full, automate your payment. You can sign up with your credit card company to automatically deduct the balance due on your card from your bank account when your statement is ready.
As long as you've lived on a budget and stuck with the pre-set credit card limit you established, you should have funds in your bank account so you won't have to worry about overdrafting thanks to your auto-withdrawal. It'll just ensure you use your money wisely to pay off your credit card debt, rather than spending it on something else.
You don't have to live with credit card debt
Credit cards are a useful tool to help you build your credit and earn rewards. The key is to use them properly and avoid getting stuck in credit card debt that costs you money and is hard to pay off. Now you know the steps to take to avoid credit card debt and you’ll be able to use your cards responsibly so you get all the benefits -- without the downside of being in debt.