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Do credit cards make you nervous? Earning sign-up bonuses and credit card rewards can sound enticing, but you worry about incurring too much debt — and the interest that comes with it.
But a debt-proofing strategy can keep you from borrowing more than you can afford. These three steps can prepare you for the unexpected and protect you from a credit card debt cycle that sends interest spiraling.
1. Start an emergency fund
Life can throw you twists and turns — job loss, medical debt, home and car repairs, other emergencies. Instead of relying on a high-interest credit card to pay for unexpected expenses, build an emergency fund to tap.
Don’t let the guideline of having three to six months’ living expenses discourage you; even a small starter fund can help. A fund of $500 is enough to cover common emergencies like a car repair or minor medical costs, according to the Consumer Financial Protection Bureau.
“You have to start somewhere, even if it’s only $25 a week,” says Thomas Nitzsche, spokesman at Money Management International, a nonprofit credit counseling agency. “Because if you don’t start somewhere, you may not start.”
Carrie Lindsey, a mother of two who runs the lifestyle blog Carrie Elle, was grateful to have an emergency fund when her car began having problems. She repeatedly drained her fund for repairs — and kept refilling it.
“The emergency fund was this ongoing gift,” Lindsey says. “It’s very reassuring and very freeing, because you don’t feel like you’re dependent on anybody else to pay those bills.”
Keep your fund in a savings account that doesn’t charge a monthly fee. The annual percentage yield will likely be low — the national average for savings accounts is a paltry 0.06% — but you can find accounts with APYs of 1% or higher.
For further growth, pay yourself automatically by routing a portion of each paycheck directly into your emergency fund. Periodic windfalls — raises, bonuses, tax refunds, birthday money — can also boost your fund
2. Maintain good credit to qualify for low-interest offers
An emergency fund isn’t always enough to cover expenses. Sometimes you need a plan B, which could involve applying for and using a 0% introductory APR credit card.
Such cards can save you money on interest for a period of time, but you may need a good credit score — 690 or higher — to qualify. To maintain good credit, it’s crucial to make all debt payments on time and use 30% or less of your credit limits.
Depending on the emergency, you might not have time to apply for a credit card and wait for it to arrive, but people with good credit have other options. A personal loan, for example, can offer faster approval, larger borrowing amounts and a fixed term — meaning you’ll have a deadline to pay it off. Weigh the cost of interest and fees before making a decision.
In some cases, you may not even need to borrow money at all. With medical debt, for instance, the provider might be able to set you up with a payment plan or you might be able to apply for financial aid, Nitzsche says.
3. Act fast if debt starts to grow
If credit card interest is already starting to pile up, you’ll want to jump into action before it gets out of hand. That can involve trimming unnecessary expenses, picking up side gigs or applying for a balance transfer credit card.
These cards allow you to transfer debt from a high-interest credit card to one with a lower APR. Again, good credit will be a factor in determining whether you qualify.
The ideal balance transfer card has no annual fee and a lengthy 0% intro APR, to give you time to pay down debt. You’ll likely still owe a balance transfer fee — generally 3% to 5% of the amount transferred — although you can find cards that don’t charge such fees as long as the transfer is made within a specific time.
If you can’t qualify for a balance transfer credit card, or if the credit limit you’re offered isn’t enough to pay down your debt, it may be time to consider other options.
“It’s really important to talk to the creditors, particularly if your circumstances are a result of something beyond your control,” Nitzsche says. “If you have multiple creditors, you can always talk to a credit counselor to see if they can help you establish a budget and set the accounts up on a debt management plan.”