If you have a credit card, or are thinking about getting one, it's important first to understand how they really work. Firstly, credit cards can undoubtedly offer you benefits to improve your finances and value for money. But they can also be used in a way that puts your financial life under strain. Yonder's mission is to help young people establish good credit behaviours while unlocking fun travel and lifestyle experiences where you live.
1. Understanding How Your Credit Card Works
Knowledge is power, especially when it comes to managing your credit card. Understand the specifics: interest rates, annual fees, and the payment period. This payment period, sometimes referred to as a grace period, is your window to pay off your purchases before interest kicks in. It's not just fine print; it's the key to using your credit card effectively. Yonder give you 15 days to pay off your bill from the previous month before any interest applies. That means you have just over two weeks before you need to pay your bill in full.
2. Establish a Solid Budget
Budgeting is an essential skill for managing your finances. Your credit card is a tool, not an unlimited cash resource. Set a monthly spending limit that aligns with your budget and stick to it. Remember, every swipe of the card is a deduction from your bank account. Make sure you spend on your credit card the same way you would spend on your debit card. Just because the money doesn't leave your account right away, doesn't mean it won't eventually.
3. Maintain Low Credit Utilisation
How much of your credit limit you have utilised can impact your credit rating. As a rule of thumb, using up to 30% of your credit limit will put you in good stead and could have a positive effect on your credit score. You can manage this by making regular payment throughout the month to keep your utilisation low. With Yonder, you can even set up automated repayments every week if you like.
4. Always Pay on Time
Late payments can come with penalties and can negatively impact your credit score. Avoid these pitfalls by setting up automatic payments or reminders to ensure you always pay on time. Some credit cards will have different repayment periods, so make sure you know how yours works.
5. Pay More Than the Minimum Due
While paying the minimum due might seem like an attractive option, it's not a sustainable strategy. The remaining balance doesn't disappear; it accrues interest. Aim to pay your balance in full each month. This is the best way to improve your credit rating over time and shows that you are effectively managing your credit.
6. Build an Emergency Fund
An emergency fund serves as your financial safety net for unforeseen circumstances. Having this buffer reduces the need to rely on your credit card for unexpected expenses, thereby mitigating the risk of debt. Try putting aside small amounts of money into a savings account each month. If something changes and you need to make a big purchase, you can dip into your emergency fund to help cover the cost.
7. Avoid Cash Advances
Many credit card providers will give you the option of a cash advance. This might sound like a good idea at the time, but watch out for high fees and interest rates. Unless it's an absolute necessity, it's best to avoid them. Use your debit card to withdraw cash if you really need it.
8. Regularly Monitor Your Spending
Take advantage of digital banking tools to keep an eye on your spending habits. Regularly checking your credit card activity helps ensure you stay within your budget and can also alert you to any fraudulent activity.
9. Don't Use Credit Cards for Loan Repayment
Using a credit card to pay off a loan merely shifts the debt while usually increasing the interest you owe. In most cases you'd be much better off looking into other ways to repay outstanding loans, such as debt consolidation or refinancing options.
By following these practical guidelines, you can enjoy the advantages of your credit card without falling into the trap of debt. Remember, credit cards are tools for financial flexibility and convenience; use them wisely to pave your path to financial stability. As you navigate the financial world, remember to keep these tips in mind. Happy spending, and even happier saving!