Don't get into a Credit-Card Crisis

It's said that the typical household has an average of eight credit cards. Now, credit cards, when used properly, are an extremely convenient way to pay for everything from monthly bills to a night on the town. They can also be used as an effective budgeting tool. But, when used improperly, they can become a nightmare of spiraling interest and accumulated fees that culminate in the closure of your account, which will start an all-new nightmare of bill collectors' phone calls and a whole new batch of additional fees. How can you keep yourself from living these nightmares? You do so by using your credit cards (and your other credit accounts, as well) wisely.

For budgeting purposes, credit cards can work as at automatic organizer. You can separate each of your major monthly expenses (gas, groceries, entertainment, etc.) with its own credit card to help with budgeting and also during tax time. As an example, using one card specifically for gas and auto maintenance is a good idea. Then, pay off at least the gas and basic maintenance charges every month just as if you were paying cash at the service station. Meanwhile, if you have a major repair done on your car, you can choose (if you must) to pay that off over time. In fact, some financial experts say that carrying a small balance from month to month on your credit cards can even help your credit score, if you exercise the discipline to use the cards only for their intended purpose. In other words, if you're inclined to use the 'emergency only' credit card for that great sale at Macy's, you're likely headed for eventual trouble.

Using the sale at Macy's as an example, let's consider what would happen if you maxed out your emergency credit card (that carries an interest rate of 21 percent) by spending $2,000 on a new wardrobe and household accessories. Now, if you made only the minimum monthly payment (say, $40 to $50), it would take you about seven years to pay off your splurge at a total cost of over $3,300! Suddenly, it doesn't sound like a very good deal, does it?

It's a good idea to have at least one credit card for legitimate emergencies, even if you have to keep yourself from using it frivolously by not carrying it in your wallet or purse, or even locking it away in a secure location inside your home. A better option, however, would be to learn to discipline your credit card usage so that you can actually carry your emergency card. If you're a few hundred miles from home and need your car repaired, the emergency credit card in your safe at home isn't going to do you very much good. In a situation such as this, you need to have your credit card with you in order to bail you out.

In today's world, credit cards are almost a financial necessity. By using them correctly, you can improve your credit score, keep track of expenditures more easily, and be assured of a funding backup should you have a breakdown. Practice using them wisely from the outset so that you'll always have access to their diverse financial benefits.