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How to avoid the common pitfalls of credit cards

Using a credit card can be a powerful addition to your personal finance game, but can also be fraught with danger.

While many Australians consider a credit card the staple of their spending needs, falling into a debt trap can be the start of a slippery slope of finances spiralling out of control.

With that in mind, here are a few easy ways to find out if a credit card is for you before you sign up and start spending your hard-earned cash.

Are you an impulse buyer?

This is one of the biggest factors that can come into play when using a credit card to maximise your personal finance game.

If you’re prone to impulse purchases, be it online or in the supermarket, then you might want to re-think signing up for a credit card.

A credit card often comes with a minimum limit of around $6,000, meaning that tendency to overspend could be exacerbated by your access to easy credit.

Do you have your ASX portfolio intact?

Before you start spending big on those big-ticket items, it’s wise to get your ASX portfolio in order to make sure you’re spending in the best way possible.

You should consider adding to your portfolio before spending big on luxury goods, by investing in your favourite ASX growth stock such as Afterpay Touch Group Ltd (ASX: APT) or a blue-chip like BHP Group Ltd (ASX: BHP).

Building out a well-diversified ASX portfolio can help build your long-term wealth and allow you to weather a financial storm in the form of a recession or market correction.

How to be strategic with your credit card

If you feel like you’re in a good place to get a credit card and control your spending, that’s great news and the next step is to find yourself a card.

When comparing cards, I like to use points earned per dollar spent as an easy metric, taking note of any sign-up fees and hidden costs on the card.

Once you’ve applied (and been approved) for your credit card, it’s important to keep your spending under control and regularly pay off your credit card balance to avoid interest fees that will eat into your strategy’s profitability.

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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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