Do you remember the first time you applied for a credit card and your application was approved? It made you feel like you were truly all grown up! That new credit card in your hand made you feel all-powerful. Pulling out a credit card is so easy and tempting. It feels like you have free cash in your pocket. However, credit cards really should come with a large warning label – BEWARE THE DANGERS OF CREDIT CARD DEBT!
Credit card debt is a leading cause in bankruptcies and other financial difficulties. Despite telling ourselves that we will never fall under the spell of the credit card, so many of us seem to end up dealing with a high level of credit card debt. As the debt level goes up, it becomes increasingly difficult to bring it back under control, which is why it is so vitally important to avoid the trap of credit card debt in the first place.
Here are some practical tips on how to avoid falling into the deep hole of credit card debt.
1. Avoid Using Credit Cards
Obviously, the best way to avoid credit card debt is to not use credit cards in the first place. If you do not have the cash to purchase the item, chances are that you do not really need it. Think carefully before pulling out the credit card. Do you really need this item now or can you wait to buy it when you actually have the cash to pay for it?
However, there are clearly exceptions to this rule. Unexpected expenses often rear their ugly head and you need to find some way to pay for them. Expenses such as medical costs or the cost to repair your car after an accident cannot be foreseen, but need to be dealt with in a timely manner. However, before pulling out a credit card, try another form of payment instead. Try building up an emergency fund that you can rely on in these situations. If the emergency fund is already dried up then consider a line of credit or an instalment loan. The interest rates for these are typically a lot lower than the interest rates offered by credit card companies.
2. Pay on Time and Pay in Full
Paying on time and in full allows you to avoid paying interest, which is the true culprit in credit card debt. When deciding whether to buy an item using your credit card, first think about whether you will have the money to pay the full amount at the end of the month. If you will not be able to do so, then think hard about whether you truly need the item.
Again, we are not always able to pay off our credit card balances at the end of the month, and often the item was a necessity. If you know you will not be able to pay everything off at the end of the month, sit down, and figure how much you need to pay each month in order to pay off the complete balance within 6 months. After 6 months, the compound interest truly starts to add up, which is a point you do not want to reach.
3. Understand Your Credit Card Terms
When you get a new credit card (or even better, before you apply for a new credit card) thoroughly read through the credit card agreement. Make sure you know what the interest rates are, how the interest will be applied to your account, when you will be charged fees, and when your interest rate will increase. Being armed with this knowledge helps in the decision regarding when to use a credit card, and ultimately in avoiding the trap of credit card debt.
4. Limit the Number of Credit Cards You Carry
The advertisement comes out regarding a new credit card, and it draws you in. The lure may be the benefits it offers, which your current cards do not provide. On the other hand, the draw might be a lower interest rate than the rate offered by your card. If you decide to apply for the new card, cut up an old card first. The more credit cards you have, the more you can charge, and the greater your debt level.
Choose your cards wisely. Perhaps look into an interest free credit card. While having thousands of dollars at your fingertips sounds wonderful and you tell yourself that you will never overspend, you are only human. Overspending sneaks up on you quietly, surprising you, leaving you reeling, and wondering how you managed to accumulate so much debt.
5. Avoid Store Credit Cards
Every time you approach a cash register at a store, it seems like someone is trying to convince you that you should get the store’s credit card. They promise great benefits and a simple application process. Do not be sucked in! Store credit cards charge higher levels of interest than other credit cards. This is because store credit cards have lower acceptance standards, making them easier for you to be approved. In order to compensate for this, the interest levels charged are higher so it is best to avoid these cards at all costs.
There is a positive side to using credit cards. Many cards offer promotional benefits, which are very attractive. Therefore, you need to learn to play the credit card game, using the card in order to gain the promotions but paying off the debt immediately in order to avoid paying the interest charges. Learn to use credit cards to your advantage.