How to Avoid Credit Card Debt in 5 Simple Steps

Credit cards are a common feature of life for most Americans: according to the Federal Reserve, 77 percent of Americans have at least one credit card. With the average credit card APR exceeding 16 percent, credit card debt is more dangerous than ever.

Follow these five simple steps to avoid credit card debt:

1. Choose the right credit card
2. Avoid too many credit cards
3. Create a budget
4. Track your spending
5. Pay off your balance

Choose the Right Credit Card

There are a wide variety of credit card issuers and even more types of credit cards. Ask yourself the following questions to determine which card is right for you:

1. Are you willing to pay an annual fee?

Some credit cards charge an annual fee ranging from $25 to $500. Though these cards often include unique benefits and rewards, you must determine if the reward is worth the fee. Many companies advertise an introductory rate with no fee or with special bonus rewards. However, after the initial year you will often be charged the regular rate. Closing your account may negatively impact your credit score. Before signing up for any card, make sure you are willing to hold on to it for a long time. If you are unwilling to pay a yearly fee, look for cards that charge no fees.

2. Does your bank offer a credit card?

A bank-issued credit card may be a good option. The card will often be tied with your account, and you can view all your finances in one place. This may be especially beneficial if you are worried about overspending. You can easily compare your assets to debts. However, keeping all your finances in one place could have negative consequences if you run into trouble with your financial institution.

3. What type of reward would you use?

Many credit cards offer rewards programs. If you use your credit card regularly, this is a great way to earn some extra cash or rewards. Cash back cards allow you to choose how you spend your rewards. Most cards offer around 1 percent cash back. There are other cards that offer points that can be cashed in for gift cards, jewelry, etc. Some companies and retail stores offer cards that allow consumers to earn points or special discounts, while travel and airline credit cards allow users to earn flights and hotel stays.

4. What is your credit score?

Your credit score could drastically impact the type of card you can acquire. Many companies, such as MasterCard, offer cards for individuals with bad credit, though they may require a deposit. Some credit cards for subprime candidates are secured, requiring some type of collateral.

5. What are the fees and interest rates?

As you choose a credit card, be sure to read all the fine print. Some cards charge hefty late fees. Others offer low introductory rates that rise rapidly with missed payments or after a set term. If you consistently make your monthly payments, you will avoid these fees. However, if you are concerned about making payments on time, choose a card that has lower interest rates.

Choose a credit card that fits your lifestyle and needs. Remember your credit score will greatly impact your eligibility for certain types of credit cards. You want to find a card that has rewards that you will actually use. If you are unwilling to pay annual fees, choose a card with no fees. Be mindful of the card’s interest rate and additional fees.

Avoid Too Many Credit Cards

How many is too many? Unfortunately, there is no magic number. According to SmartAsset, having several credit cards has advantages and disadvantages. More cards allow you to spread out balances, lowering your credit card utilization ratio — the percent of available credit in use. Also, more cards mean more lines of credit. Both factors can positively impact your credit score. Additionally, you may be able to maximize rewards with multiple cards. You may open an airline, gas, and cash back card. Using a card specifically designed for a certain type of reward will help you earn the most points and rewards possible.

On the other hand, opening multiple cards at once can negatively impact your credit score. Furthermore, some credit cards require a hard credit inquiry. Both of these factors can lower your credit score. However, the biggest disadvantage of too many credit cards is the challenge of tracking your spending.

If you are concerned about credit card debt, avoid having too many cards. One to three cards will likely meet your needs. As you learn to effectively manage your spending and avoid debt, you may consider opening more cards.

Create a Budget

Creating a budget is easier than ever, especially with the many free apps and templates available. Basic steps include the following:

1. Track current spending habits
2. Record income
3. Set goals
4. Create spending limits

Your budget can be as detailed or as simple as you would like. Some people lay out specific limits for individual categories, while others designate a specific spending cap for the month. Find what method works best for you, but remember to allow room for flexibility in case of emergencies.

Track Your Spending

Use your newly created budget to regulate your spending. Treat your credit card like a debit card. Every time you make a purchase, deduct it from the designated amount in your budget. When your running total equals zero, you are done using your credit card for the month. Your budget becomes your credit limit, rather than the amount set by your financial institution.

You can track your spending with a spreadsheet. Keep your receipts and add your purchases to the sheet each evening. If you prefer paper and pencil, you can use the free check register from your bank There are also a variety of free apps and online tools.

Track your spending through your credit card institution’s online account as well. You may forget a impulsive purchase or lose a receipt. While checking your outstanding balance, monitor your account for fraudulent activity.

Pay Off Your Balance

It is extremely important to pay on time. Set a reminder alert in your phone or email. If you have tracked your spending and adhered to your predetermined budget, your monthly credit card bill should be no surprise. Pay off your entire balance every month. Carrying a balance, even a small balance will add up over time. The exorbitant interest rates will quickly turn into credit card debt, if you are not careful.

Following these simple steps will help you avoid credit card debt, overspending, medical emergencies, or unemployment may derail your best efforts. If you find yourself in credit card debt, consider working with a top ranked debt relief company. Many companies will assign you a professional credit counselor to help you regain control of your finances.

Originally published at bestcompany.com.