Anyone who’s ever dug themselves out of debt can tell you it’s a process they’d like to avoid repeating if at all possible. The process generally requires a lot of sacrifice on the part of the borrower — and stress too. It makes sense you’d want to avoid jumping headfirst into even more debt just as soon as you’ve tackled the original balances.
It’s completely understandable to feel hesitant about credits after getting out of debt — especially if you went through a debt management program that required you to close accounts and freeze your credit. After all, trying to pay for everything in cash can be inconvenient. And, while debit cards are a great tool everyone should have in their wallets, they don’t qualify cardholders for perks and rewards the way credit cards do.
If you want to reap the benefits of using credit while also avoiding more debt, here’s what to do.
- Set Up Automatic Payments Right Away
It’s a simple action, but one that can save you from late fees, APR hikes and delinquency. Link your checking account into which you deposit your income with your credit card account. Then the only responsibility you’ll have is to make sure you have enough money coming in to cover those credit card payments.
Most credit card issuers allow you to either pay the balance in full, or to automatically pay a set amount each month. Just make sure to keep a close eye on those payments so you can catch errors and avoid overdraft fees.
- Put on Credit Only What You Can Pay in Full
The next step is perhaps the most important: Only purchase on credit what you can afford to pay in full each month. This is the only way to avoid accruing interest — and credit cards are notorious for carrying high interest rates, which is why it’s so easy for this type of debt to spiral out of control.
According to Bankrate, the average annual percentage rate (APR) is just over 16 percent. However, it’s very common to see APRs north of 20 percent. In other words, borrowing money is expensive. Paying off your balance in full will allow you to capitalize on the benefits of credit without tacking on costly interest over time.
- Keep Credit Utilization Below 30 Percent
Credit utilization measures the percentage of available credit you’re currently using — both per card and in total across all of your accounts. Divide an account’s balance by its limit, then multiply that number by 100 to see where you are. As an example, carrying a $1,000 balance on a card with a $5,000 limit yields a credit utilization ratio of 20 percent.
Experts vary on their advice for optimizing your credit utilization ratio but keeping it at or below 30 percent is a good general target.
Since credit utilization factors heavily into credit score, you’ll be doing yourself a favor by avoiding maxing out your cards. Plus, it’s a good reminder to charge only what you can pay off before next month.
- Check Your Credit Report At Least Annually
This last tip has to do with playing an active role in your credit journey. In today’s busy world, it’s all too easy to “set it and forget it,” or to put off checking in on your financial situation. But there’s really no excuse for staying in the dark — you can request one free copy of your detailed credit report from each of the three major bureaus every year. This will allow you to dispute errors and get a better understanding of the actions affecting your credit score.
Using credit after climbing out of debt can be daunting, but having a plan to keep your spending in check will help you avoid having to repeat that process.