Raise your hand if you have ever been or are in credit card debt? Ok, you do not really have to raise your hand, but I am willing to bet that at least 98% of the people who read this fit the bill. I am also willing to bet that you are reading this because you are in credit card debt or you are trying hard to stay out of it. Paying your credit card bill can be challenging.
I do not think I know a single person that has not experienced some credit card debt. And why is that? Because credit cards are designed to encourage us to borrow money. That is the entire point of their existence. Lenders give us this nifty little card that is supplied with money that we can spend, and then owe interest on.
I am not being cynical or negative here. These are facts. How else do credit card companies make money? They loan you the money, you pay it back with interest. It is just like a loan, but if it is so simple why are so many people in credit card debt and how can a person stay out of it? Let’s answer these questions one at a time.
Credit Cards 101
Take out your pencils and your notebooks- we are going back to school. Let’s start with some basic information on credit cards– really basic so everyone is on the same page.
How They Work
Credit cards are really just personal loans on a card from which you can continually borrow money. When you apply for a credit card, the lender takes a look at your credit score and credit history to decide if you are a good risk. If you have a good credit score and payment history- and an income- you will likely be approved. The amount you are approved for, your credit limit, is determined by how much they feel safe letting you borrow. It will usually depend as much on your income as it does anything else.
Once approved, you will receive a card in the mail within a few weeks. The card will have money attached to it that you can then use. When you swipe that card for a purchase, there is an agreement made between the credit card company and the seller in which the credit card company basically says, “I’m covering the sale.” The retailer then transfers ownership to you because they know they will be getting paid. Paying your credit card bill is on you, not them, so if the credit card company covers the cost, the item is yours.
And what then?
At the end of the billing cycle, the credit card company calculates the amount that you have used and the interest. They send you a bill of that amount where they are basically saying, “Hey, remember when I fronted you the cash to pay for your stuff? It’s time to repay, but it’s cool if you do not have the full amount. I added another number on your bill of a much smaller amount you can pay right now.” As you pay down or off the principle amount you owe, your credit limit will replenish and you can borrow it again. This is known as revolving credit.
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Paying Your Credit Card Bill on Time Each Month
Yes, we have finally made it to the main purpose of this article- paying your credit card bill on time each month. Let me start by saying that it is not as hard as it may seem. It can be overwhelming in the midst of trying to figure everything out, but you can relax. I have some really simple tips for paying your credit card bill.
If you are like most people, you are really tired of hearing the word budget. Unfortunately, it is necessary. You can always find a new word to call it. Creating a budget is important if you want to pay your credit card bill on time. For now, let’s go with financial planning. That sounds a little better.
Again, financial planning is key to paying your credit card bill. You have to have the money to pay the bill, and you have to have a plan for getting that money. Rework your financial plan to make sure the funds you need for paying your credit card bill are included and set aside.
Also, paying your credit card bill once a month is not the only option. Try instead paying something out of each check. If your minimum payment is $25, try paying $25 out of each check. This will ensure that you are never late paying your credit card bill, and it can help pay down your balance sooner.
Set Up Auto Pay
Another awesome thing about technology is that is can now make payments for you. How awesome is that! You can set your credit card account to take money from another source when the payment is due- no thought necessary. If you are like I was and are rolling your eyes saying something like, “But my bill is due before payday. If I set up auto-pay, I might end up with overdraft fees.” Not if you change your due date, which is something most companies allow now.
Remember that they actually do want their money back, so most of them will work with you on things like this.
I would also like to point out the fact that using auto pay is no excuse for ignoring your bills. You still need to look at them and make sure that you are being charged correctly. Do not overpay simply because you stopped looking at your bill details.
Stay within Your Limit
Yes, this should be understood, but sometimes it is not. Some credit card companies are a little lax and will let you go over your limit. In fact, they have a fee for when it happens. Keep up with how much you use on your card, and stop when you are at your limit- earlier if you can.
With all of this technology around us, there really is no excuse for forgetting anything. Set reminders in your Google calendar, the Asana app, your phone’s calendar, or where ever you keep up with dates. I love electronic ones because sometimes I get so busy, I forget to look at my calendar. I need reminders that actually remind me, so an alert on my phone or tablet is much better.
Only Borrow What You Can Afford to Repay
Part of paying your credit card bill on time relies on being able to afford your payment. There is a very simple way to make sure you can afford it. Do not borrow more than you can pay back.
Pay the Full Amount Every Month, if possible
Again, you need to be able to afford your bill, which you will not be able to do if the interest is growing astronomically. Try very hard to pay the full bill every single month so your payments do not get unbearable.
Introductory Promotional Periods
Many credit card companies offer a promotional period in which you do not pay interest on your credit card charges. This might be for the first month, the first year, or any other length of time the company chooses. It is an incentive they offer for signing up. These promotional periods can be wonderful times to make large purchases, like a refrigerator, if you can pay it off before the promotional period is over. If you sign up for a credit card with a promo period, be sure you know the ins and outs of the promotion. And do not go on a spending spree just because you can. Remember, the idea is to actually make paying your credit card bill possible, so overspending is counterproductive.
Fees and Interest Rates
Every credit card that I have ever known has some type of fee attached, and there is definitely interest. Some fees you might come across are annual fees, late payment fees, and cash withdrawal fees. Most fees can be avoided. Pay your bill on time to avoid late fees, do not get cash withdrawal, and so on. However, annual fees can only be avoided if you find a company that does not charge them. There are a few out there, but before you make up your mind, check out the perks of the cards with annual fees. Sometimes you get rewards that will more than cover that fee, so compare before you choose.
Here comes the fun part: the interest and how it is calculated. This section could quite literally carry on for pages and pages because there is so much to the topic of interest, but we are going to stick with some basics.
Compound vs Simple Interest
Simple interest means that you pay interest on the amount of money you use on your card. If you use $200, the interest is calculated for that and that is it. The next month, you will again only be charged for the amount you have actually used.
Compound interest is very different. The simplest definition is paying interest on the interest that you already owe. Sounds crazy, right? To illustrate, let’s say I borrow that same $200 at 25% interest. I would then owe $250 back once interest was included. If I decide not to pay my bill in full this month and instead only make the minimum payment, there will be some interest left. So if I pay $25, I will still owe $225.
The next billing cycle, any interest that has carried over is now considered “borrowed” as well. Instead of being charged 25% only on what I have borrowed, it will be calculated on the full $225. The interest will simply add on top of the interest, i.e. compound. This will continue until you pay your bill in full. If you have the opportunity to choose a simple credit card over one with compound interest, that will be the wiser option. If you do not have that opportunity, attempt to pay your full bill every single month
Variable vs Fixed Interest
Variable and fixed interest are easier to understand. Fixed interest means that the interest rate will remain the same through the specified term while variable interest can fluctuate. With fixed interest, it is possible to somewhat predict your bill. Not so much with variable interest, though.
Pros and Cons of Credit Cards
Credit cards can be both a blessing and a curse, but they are almost necessary in today’s world. Below are two of the biggest pros and cons of credit cards that you should know:
Credit cards are one of the most convenient financial tools ever, I believe. You do not have to worry about dropping or losing cash, it takes so much less time to check out, you can shop online with them, swipe them at the gas pump so you do not even need to walk into the store, and they let you spend money you do not yet have. Is there any wonder why people sign up for them?
About ten years ago, a friend and I piled our five children into her Expedition to visit this new thrift store about an hour from home. In truth, we had plenty of thrift stores nearby. We just wanted to get out. We walked around that store for probably two to three hours, jumped back in her SUV, and started to head home.
No more than two minutes down the road, we noticed that one of her tires were flat. We pulled into the next parking lot, which happened to be a WalMart- thank goodness. Here we were an hour from home in the summer time with five hot children and no cash. We thought we were being smart only carrying cash with us to the thrift store so we would not overspend. Though it was smart, we probably should have carried something extra.
Even worse, we had no one to call for help. My husband was in the military back then and a very long way from home. Her husband worked out of town, so he too was nowhere near us. Ever the hopeful one, I started clawing through my purse with the idea that some money would miraculously appear so we could purchase a tire. And like an answer to a prayer, I suddenly saw my credit card.
A credit card can come in handy
I had intentionally forgotten that I had signed up for this credit card because it was only meant for two reasons. The first was that there were times my husband would call and say he was back on post with no notice. As I did not want to miss the chance to see him, that credit card was intended to pay for gas, airfare, hotel stays, and so on in case we did not have enough in the bank.
The second reason for the card was, well, emergencies. With it being just me and two little ones, I did not want to be stranded with no one to call. The predicament we were currently in just happened to fit that second reason to a “T”, so to speak. I was able to purchase a tire so we could get home.
As I said, credit cards are incredibly convenient, and they can help you build your credit- if you are paying your credit card bill on time. Unfortunately, the convenience of credit cards also has the propensity to lead you down a dark path of financial ruin if you are not managing it well. To make it help your credit instead of hurt, follow these steps:
Really, it all comes down to being responsible with your money and your debt. Do not borrow more than you can repay. Avoid borrowing just because you can. Make paying your credit card bill in full as often as possible a priority, and ensure that you are paying your credit card bill on time. Definitely pay more than the minimum balance so you bill stays manageable.
Staying Under 30%
Credit utilization is a huge factor in your credit score. Basically, it is the percentage of your available credit that you are using. You need to keep that utilization under 30%. For instance, if you have $1,000 of credit available to you, you want to be using less than $300. Why? Lenders like to know that you are worthy of borrowing money, but that you do not really need to. This means that you should not run out and spend the $1,000 on unnecessary items just because it’s there. If you do have to use more than 30%, just try paying your credit card bill down to 30% before the end of the billing cycle.
Know When to Use Your Card and When to Use a Personal Loan Instead
If a credit card is really just a loan on a card, why would you need a personal loan? Though it is, in fact, a loan, different terms, interest rates, and fees come with them. Most often, a personal loan has lower interest rates and longer repayment terms while credit cards are much more like quick cash loans- high interest and short repayment terms. You should be aware of the pros and cons of credit cards and personal loans.
Before we go any further, the following suggestions are relative to certain conditions, i.e. interest rates, promo periods, and so forth. These suggestions are based on having no promotional periods or other external factors that might affect prices and repayment- more on this in a moment.
As credit cards and personal loans are so different, they are actually each beneficial for different circumstances. Below is a list of times when each would be a better choice than the other:
Times to Choose a Credit Card:
- If you need money for gas, some household supplies, or other items lower cost items.
- A movie ticket
- Grocery shopping
- Paying a bill that is due before payday
These items would be best on a credit card because they are smaller purchases you could most likely pay off during the current month or by the next one.
Times to Choose a Personal Loan:
- For purchasing a car
- You have gotten behind on your bills and need some time to straighten things out.
- Any purchase that will take you multiple months or longer to pay off, i.e. appliances
- A vacation or wedding
These items are best for a personal loan because, most likely, you will not be able to pay off the full amount in one payment. Instead of putting something that will require multiple payments on a credit card that will charge you a lot of interest, look at personal loans instead. You are still charged interest, but it is spread out over payments instead of owing the full amount every month.
Credit Card Consolidation
If you are currently in a lot of credit card debt, you might consider credit card consolidation. This basically means that you are borrowing the money from another source to pay off your current debt. The new debt, ideally, charges less interest, and you only have one payment to make instead of multiple ones. There are two common ways to do this- with a personal loan and with credit card refinancing.
With a Personal Loan
If you owe a total of $1500 in credit card debt, you could use a $1500 personal loan to pay it all off at once. This gets rid of the ridiculous interest that is stacking up and choking the life out of you. Ok, maybe that was a little dramatic, but you get the idea. You need to be aware of the differences between credit cards and personal loans.
Once you have paid off those credit cards, you will owe the lender the $1500 back, but here’s where the benefits come in: Typically, your interest is calculated up front- most likely with a fixed rate- then spread out over a period of months or even years. Finally, you can breathe. Let’s look at how different it would be than continuing paying your credit card bills.
If you owe a total of $1,500 in credit card debt, you might be getting charged as much as $375 a month in interest alone. I do not know about you, but even if I could afford that, I would not want to throw away that much of my hard-earned money on interest- an intangible thing that brings me no excitement whatsoever.
Now, let’s say you a $1500 personal loan. For the sake of fairness- and to really drive home this point- we will keep the 25% interest rate (this is actually really high interest for most personal loans). You agree to a 12 month repayment period. All of this means that you owe a total of $1875 to the lender, and your payments will be $156.25 per month.
That’s it. There is no additional interest because it was already calculated and added into the total amount of the loan. For almost 1/3 of the credit card payment, you can pay your entire debt off and save more than $200 per month in interest- yes, please!
Credit Card Refinancing
You can also refinance your credit cards with another credit card. I know it sounds a bit counterproductive, but under the right terms, you will still save money. Again, we will use the $1500 debt and 25% interest as the current charges. You might be able to find a new card with much lower interest or even one that has the 0% interest for a year. By using the new credit card to pay off the previous ones, you are still consolidating into one payment with low or no interest.
Credit Card Shopping
Okay, do not get too excited. This does not mean to take your credit card out and enjoy a shopping spree. This type of credit card shopping actually means shopping around for credit cards. Never assume that you are getting the best deal. The card you have may have been the best option at the time you got it but credit card companies compete, so they are consistently changing what they can to win customers.
On a regular basis, shop around for the lowest APR credit card x and best terms. Take advantage of 0% introductory rates when you can. Remember that you can use a new credit card with no interest to pay off other cards and save yourself some money. Here’s a list of credit cards to consider:
You can put in your information right here on Loanry, and get offers within minutes.
It is sometimes amazing that something as small and thin as a credit card can destroy entire lives. But that is how powerful they are. If you use credit cards, you should work hard to master them instead of letting them master you. With the information and the tips here- as well as some determination- you can take control of your credit cards and your financial life.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.