The new wave--credit cards? Some ideas how to use them properly.

Recent reports in the New York Times indicate that lenders faced with loss of profits in this difficult environment are rediscovering the benefits of issuing credit cards to people with less-than-stellar credit.

We have always felt that having and using credit cards is an important part of financial success. Proper use for purchases gives you protection through the billing dispute process. Proper use paying each month's charges in full is an important building block to a good credit score. And a charge card may be a lifesaver in a true emergency. The trick, like everything else, is knowing how to use cards.

For useful guidance, check out Federal Reserve Guide to Credit Cards. We recommend to avoid using charge cards for anything you can watch, listen to, eat  or drink (other possibly for on-line purchases). But most important is to do a budget and keep track of what you are charging.

The budget is easy. Add up how much money you can reliably and consistently count on receiving each month. Let's call that Monthly Net Earnings.

Next, calculate your Required Monthly Expenses. For items like food and groceries, you may want to track what you spend on a weekly basis, then multiply by 4 1/3. Some items like clothing are easier to use an annual figure and divide by 12. Don't forget medical expenses, prescriptions, co-pays etc. Think carefully about transportation, and don't forget to add $10 per month for the cost of replacing tires. Our website's Forms page has a a personal budget spreadsheet template you can use if you have Microsoft Excel. Others are readily available.

This is something you can do yourself. Be realistic. Now you know how much you can afford to pay for any new debt.

Next you have to avoid the "minimum payment" trap. Say you charge $1000.00. You may only have to pay 4% or $40 per month. Sounds easy, right? In fact, you might end up having to pay for as long as 10 years or more, and a lot of interest. Check out this calculator. Worse, the feeling that you can afford to charge more can easily get you in over your head. Instead, if you cannot pay your balance in full in a particular month, stop using the card until you have paid off the balance, and allot enough to pay off the balance in 6 months or less.

So that you do not charge over your head, keep track of your charges. Save each month's charge slips, clipped together in your wallet or purse. With each charge, write the total monthly charges to date on the slip. This should be easy as the last charge will have that cumulative balance to date. The numbers need not be exact, approximations will do. Or keep a "check register" listing all the charges. Even better, don't use the card more times than you can easily keep track of.

From over 27 years of helping people in financial trouble, this advice comes from their hard experience.