It’s entirely possible to build a positive credit history by using credit cards while living paycheck-to-paycheck, but you have to tread carefully.
When I opened my first credit card as a college student, I was definitely living paycheck-to-paycheck. Today I’m much more financially stable, but thanks to student loan debt and an auto loan, my budget is still pretty tight. As a result — and after some honest mistakes — I’ve had to fine-tune my credit use to make it fit my budget constraints and still be a useful tool.
Here are some tips to help you do the same if you’re living paycheck-to-paycheck:
1. Decide how to use your card ahead of time.
Relying on credit as an extension of your monthly income will quickly drive you into debt. Instead of spending on plastic however you please, designate a handful of specific bills or regular purchases as your only credit card expenses.
I currently have a card that pays only my monthly Netflix bill of $8.95 and two weeks of fuel, which is usually about $20-$25. I was going to use the money in my checking account to pay for those expenses anyway, so doing this doesn’t affect my spending plan and it keeps my cards active. Not using credit cards for a long time can lead to additional fees or even a closed account — which could negatively impact your credit score — if your issuer decides to take action. I also make sure to pay my credit card balance off after I make the charges.
2. Don’t waste money on annual fees.
If you’re on a tight budget, cutting extra costs is essential. With so many no-annual-fee credit cards on the market, save precious dollars and apply for one of those cards. If you currently have a card with an annual fee, do things in the right order: First, pay any remaining balance, and apply for a different fee-free card. Once you have the new card in hand, then you can freely close the fee card.
I wish I had paid more attention to fees before I applied for my second card, which is a travel rewards card with a $95 annual fee. I’m currently in the hunt for a new card, but I’ve already paid the annual fee for 2015. Avoid a similar situation and only give your attention to cards with as few extra fees as possible.
3. Don’t carry cards with you all the time.
If you know you are an impulsive or emotional shopper, leave your plastic at home when you are headed to a store or social event that may encourage you to spend money you don’t have. If you don’t have it, you can’t use it.
Also, avoid saving your card information as a preferred method of payment online. Besides being a security risk, having card info on file makes it too easy to click a few buttons and make a purchase without thinking twice about the financial implications. I’ve noticed that I spend my money more carefully online if I have to actually go get my card out of my wallet and manually type in all the information.
4. Pay your balance off frequently.
Monitoring your spending on a tight budget is hard (and stressful) enough without adding a credit card account or two to the picture. To keep better tabs on financial behavior, pay off your credit cards at the end of each week or as each paycheck comes in instead of waiting until the end of every month or until the due date rolls around.
Paying off your (planned) card balances each week ensures you won’t carry a balance long-term and can make managing your finances less stressful, since you are breaking it down one week at a time instead of facing a big balance when all your other bills are due.
I’m trying to get better at this and have started checking my card accounts at the end of each week to ensure my monthly budget is on track. If something is off, I adjust my spending for the next week accordingly.
5. Save money.
If you don’t prepare financially for the unexpected, your credit cards often have to come to the rescue, leaving you with interest-accruing debt your budget can’t handle.
Saving money is something many Americans struggle with, according to a March 2015 survey conducted by NeighborWorks America. Approximately 34 percent of U.S. adults don’t have emergency savings and of those that do, 47 percent said their savings would last them three months or less. I personally fall into that 47 percent pool, which is concerning, but hard to address when a tight budget only lets you to save so much at a time.
It’s hard to tuck money into savings when the rest of your life demands it be used now, but it’s important to start somewhere, even if it’s only $20 each payday. Establishing a cushioned savings account will keep you from having to rely on credit cards and make your credit journey a positive one.