Tuesday, June 25, 2013

How to Avoid Credit Card Debt

Avoid Credit card debtOften, when people get their first credit card, they will immediately buy something, sometimes something that is more than they can afford.  Many first time credit card holders will tell themselves that they will not fall into the debt trap,  but those who use credit cards with the “buy now, pay later” mentality usually will.  Credit cards can be a great tool if used responsibly, but if misuse of credit cards can lead to trouble.  Here are a few simple ways to avoid credit card debt. 

The biggest factor in staying out of credit card debt is having the mentality to charge only what you can afford.  I personally never carry a credit card balance higher than the amount in my checking account, that way I can pay it off at any time.  This is a good tactic when using credit cards.  Frequently many people ignore the affordability of necessity of an item they are purchasing with a credit card, as the vast majority of consumers in today’s world are impulse buyers and think they’ll pay it off later.

Another great way to avoid credit card issues is by creating a budget.  Having the mindset of staying within a budget when using a credit card will cause fewer headaches because you’ll have a firm understanding of what you can spend and pay off in a given period.

The single best advice I was given about credit cards is to pay most if not all of your balance every month.  This might seem like common sense, but you’d be surprised how many people don’t do this.  When a credit card statement comes in at the end of the month, a great deal of credit card holders will actually just pay the minimum balance and not much more, which is only $15-20 per month for most cards.  With interest on most cards being rather high, it could take months or even years to pay off some balances depending on how much is owed and the APR rate of the card. 

Along with paying the balance, making payments on time is the single best thing you could do to alleviate credit card debt.  If you pay the minimum on a card one month and needed money for an emergency but you know you’ll pay it off the next month that is fine as long as you pay on time.  If you miss a payment or are late you will be penalized in multiple ways.  Numerous credit card companies will raise interest rates if you are late multiple times, and this will also damage your credit score.  I personally have a 0% interest card for a set number of months, but if I were to be late or miss one payment, then my interest rate would go up to 29.99%.  Being able to pay on time will help you, and the more on-time payments you make, the more it’ll positively impact your credit score. 

There are some benefits to responsible credit card use.  Many cards offer benefits to their card holders such as cash back, point rewards, as well as low or even 0% interest rates for a certain period of time.  When used responsibly, credit cards can make you money with cash back rewards.  Depending on how often a card is used, the cash back rewards can be put towards the balance of the card and help pay it off.  Many card companies offer either a reward program where you get a certain percentage back on various types of purchases or a nice lump sum at the end of a statement or yearly cycle. 

Credit cards also offer more than just rewards, as they can help establish and improve credit.  Many credit companies offer student and secure cards.  A secured card is a credit card that the user puts a set amount of money into an account and can use up to that amount as their credit limit for a set length of time.  The consumer will get their money back in full when the card company decides to make the card unsecured, which means there is no collateral as a backup and it becomes a normal credit card.  Student cards are offered to those who are just starting out and establishing credit.  These cards are usually given with low limits and fairly low-interest rates.  Both cards are a great option for those looking to establish and build credit while at the same time learning to manage a credit card responsibly. 

When used responsibly, credit cards can be a valuable asset.  Learning to maintain a budget and how to use a credit card is one of the best personal finance steps a person can take.  Staying out of credit card debt can easily be achieved by knowing what you can afford as well as paying off balances on time every month.