by Maxwell Payne

Created on: October 28, 2008   Last Updated: February 26, 2009

How to use your credit cards wisely.

The problem with credit cards isn't the high interest, late fees, or seemingly malicious lure of free money. Rather the problem with credit cards lies with the person holding the credit card. If this sounds absurd, then you might be one of those people. Credit cards are a great financial tool when used properly and with some of the information that follows, you too can become a 'deadbeat', the credit card companies insider term for those customers that always pay in full and thus rob the company of profit boosting interest and late fees.

First things first; credit cards are not free money nor are they 'extra' money. Credit card limits aren't a free pass to spend that much money, rather a challenge in controlling spending habits and a chance to increase your credit score when used properly. The biggest pitfall of most credit card holders is that they put 'other' expenses on their card; treating their credit limit as something outside their normal budget. They treat the credit card bill as a surprise each month and as an expense that they liken to any other bill.

Reversing one's thinking about credit cards as extra money and the monthly statement as another extra bill is the first step to using your cards wisely. As outlandish as it may sound, treating your credit card like a debit card is the best way to benefit from using a credit card and in developing a sound spending budget that you'll rarely exceed.

When you write a check, you generally deduct that amount from your checkbook, don't you? You do this even though the money is still sitting in your account for a few days after writing the check. How come most people don't do the same when using their debit card or swiping the plastic? Taking each purchase you make with your credit card and deducting it from your current bank balance either through the use of a checkbook register or money management software (like Mint.com or Quicken) helps ensure that each month you wind up with a credit card balance that you can afford to pay in full.

With paying in full each month comes a slew of benefits that comes with using your credit card wisely. These benefits include getting rewards points or cash-back if your credit card offers it without those rewards being wiped out by interest and fees. You'll also be able to park your cash in interest earning accounts like ING direct; letting the money you spent on your credit card float until the bill is due effectively earning interest instead of paying interest on your purchases. You'll also keep your credit score on the rise by paying in full every month, securing your place as a responsible spender and a low-risk to financial institutions should you need a loan, cell phone, car, or home.

Some tips to keeping your spending in check so that you can pay your bill in full each month include monitoring your purchases against your current bank statement (don't spend money you don't currently have), treating your credit card like cash, and monitoring your credit card statements. You'll pause before flashing the plastic for a big purchase, you'll end up with money in the bank even after paying your bill, and you'll catch any fraud or misspending on your card more quickly.

One could go on to talk about all the fees and high interest you won't be paying when you treat your credit card spending as part of your budget and not extra money; but simply put paying your credit card off in full each month will put more money in your pocket, and earn your rewards or cash back from your credit card if you are into that kind of thing. And it'll free you from feeling like you'll never pay off that new dress purchase or that latest MP3 player that was the latest a year ago.

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