Financial Planning

Credit card debt is a huge problem for American families — more than most realize.

Statistics from the Federal Reserve show that the average American household has nearly $9,000 in credit card debt. Sure, there are some families that have no debt at all. On the other hand, there are families that have much more than $9,000 in credit card debt. Unfortunately, once you’re in debt, it’s difficult to get out of.

It seems like everywhere you turn there’s an advertisement for credit counseling, debt settlement, debt consolidation, or some similar debt management solution. Why are there so many? Because those “solutions” don’t always work.

If you don’t want to be faced with the difficult task of paying off your credit card debt or filing bankruptcy, the best option is to avoid it all together. Here are some ways you can avoid credit card debt completely.

Live within your means.

You should never spend more money than you make in any given month. Once you start increasing your expenses, you’re more likely to resort to credit cards to finance your lifestyle. You may start off just dipping into your savings, but before you know it, you’ll be using your credit card to help fund your life.

Use a budget to help you figure out whether your expenses fit within your income and look for ways to decrease your expenses when it’s necessary. Continuously update your budget – both income and expenses – to reflect your changing lifestyle.

Have an emergency fund.

Without a healthy savings to use in an emergency, you’re more likely to use a credit card to bridge the gap between the money you have and the cost of the emergency. Then, you’re left with a credit card bill to pay off whenever you can afford it.

It’s a good idea to build up an emergency fund that’s three to six months of your living expenses. But, since that can take some time, start by putting away $1,000 to cover small emergencies like insurance deductibles or medical bills. Then, work on building your ideal emergency fund by adding funds consistently, or by finding the best savings account rates.

Only charge what you can afford to pay.

This guideline might be the only one you need to follow to stay out of credit card debt. If you only charge what you can afford to pay back by the end of the month, then you won’t accumulate a massive amount of credit card debt.

Use your budget to figure out whether you’ll have enough money to cover an expense on your credit card. Review that amount before making credit card purchases to be sure you can afford a charge.

Pay your bill in full every month.

When you pay off your credit card balance every month, you don’t accumulate interest on the balance. Not only that, paying off your balance immediately keeps you from delaying balance payoff even longer.

If you’re only charging what you can afford, then you shouldn’t have any problem paying off your entire balance when the statement comes.

Leave your credit cards at home.

Many people end up with credit card debt because they make impulse purchases. If you don’t take your credit card with you when you go shopping, you can’t charge any purchases on it.

You’ll also be smarter about what you charge with your credit card since you have to physically go get it to make a purchase. By the time you do that, you might have changed your mind on the purchase all together.

Don’t be influenced by your friends.

The people you hang around can influence you to spend more money than you really have. In an attempt to keep up, you could resort to using your credit card to buy things you can’t afford. This goes back to the previous rule about charging things you don’t have the money for.

Peer pressure is real — and it could cause you to fall deep in credit card debt if you don’t pay attention to how you’re being influenced.

Equate credit with cash.

It’s easier to use your credit card because the money doesn’t physically leave your wallet (or checking account) until you pay the balance. But, you get gratification for your purchase instantly. The “enjoy now, pay later” mentality can lead you to overuse your credit card.

When you use your credit card, picture cash leaving your wallet or money leaving your checking account. You’ll be less likely to use your credit card that way.

Just use cash.

Staying out of credit card debt could be just as simple as avoiding credit cards all together. If you never use your credit card, you generally don’t have a balance to worry about paying back. (The exception is you have a credit card that charges fees whether you use the credit card or not.) You could use cash or check card for all your purchases and never owe a single penny in credit card debt.

Of course, the drawback is that you may have trouble borrowing money for a car or house because you haven’t demonstrated experience handling credit. This isn’t true 100% of the time, but it can happen.

Staying Debt-Free

When you’re making credit card purchases, keep in mind that you’re borrowing from your future income, an income that’s not guaranteed. Follow the steps listed above and your wallet will appreciate it. To learn more about being debt-free, read our debt-free manifesto.