How to use credit responsibly

Credit is tempting to think of as free money, so long as you pay the minimum payment on your cards each month. When you’ve maxed out one card, it’s easy to open another. Yet you may find yourself facing bankruptcy if you rely on credit cards to finance your lifestyle.

Bankruptcy often occurs due to financial factors outside of our control, such as divorce or medical bills. Yet around 15% of filings occur due to excessive spending. If you use your credit cards like an ATM, you may run the risk of joining these ranks. Taking these steps to curb your bad credit habits can keep you from doing so.

Pay your full balance

Minimum payments can tempt even the most careful credit users. But if you can pay your full balance each month, do it. The amount may seem too burdensome to pay in one lump sum. In this case, you could make smaller payments on your cards throughout the month. Many providers now allow this thanks to the ease of online bill pay.

Heed your interest rate

You may have applied for credit cards for their initial interest-free period. Once this period ends, these interest rates often skyrocket. You may end up owing far more than your initial balance if you don’t make full payments on time. And this behavior may lead to a spike in your interest rates for cards you apply for in the future.

Keep your credit utilization low

Having a total credit limit in the five or six-figure range is common. But that doesn’t mean you should spend your cards up to that point. Utilizing 1-10% of your total limit can keep your credit in a healthy spot. Once your balance exceeds 30% of your credit limit, it starts negatively impacting your credit score.

Credit cards can be useful tools if you use them with caution. Treating them as free money could lead you down the road toward bankruptcy. But deploying them responsibly can help strengthen your finances.