Ever since its introduction in the 1950s, credit cards have arrived and how! These small, unassuming pieces of plastic have entirely changed the entire landscape of the financial world.
From paying for goods and services through cash, sometimes hoarding a considerable amount to pay for expensive purchases, to paying for the same through credit, spending practices have come a long way.
Please apply for a credit card to make use of it well with all rewards and perks. Credit cards are essentially plastic money that allows individuals to pay for their purchases on credit and repay the same during the next billing cycle.
In other words, individuals can pay for their purchases through small loans that they can avail of instantly. Just like loan repayment, individuals will have to pay this amount back during their billing cycle.
4 Best Ways To Avoid Credit Card Debt
If the loan amount is not paid completely, interest will be charged on instalments as well. Credit cards come with several benefits such as the convenience of paying, Reward Points, other perks with spends, and so on.
However, too much of a good thing can be destructive and not utilizing a credit card the right way can have severe repercussions for an individual’s finances.
Although it is convenient to purchase products and services on credit to pay later, a severe interest will be levied if the payment is not made on time. If this continues, the person will spiral into debt which will be hard to recover from.
Below are some of the common mistakes made by credit card users, which will lead them into a credit card debt trap.
#1. Not Understanding Your Credit Card
There are many credit cards available in the market today with various features, benefits, rewards, rates of interest and so on.
All banks and financial institutions entice customers to purchase the credit cards they offer, which may result in the customer getting thoroughly confused and purchasing the card that is not meant for them.
For example, suppose the customer travels a lot for work or pleasure and purchases a card that provides dining benefits instead of AirMiles.
In that case, it may not be as beneficial for the individual, resulting in their either wasting the credit limit or spending more money on purchases that are otherwise not needed.
Additionally, if the individual cannot repay the amount charged to their card in one go, interest will be charged. Who, in turn, will lead them into a debt cycle that is not easy to come out of.
#2. Buying an Expensive Credit Card
As consumers, all individuals are flooded with offers to purchase new credit cards. Banks even call customers intending to persuade them into buying their credit cards while talking about the benefits that it will bring.
However, not all credit cards come for free or a low fee. Certain cards come with a relatively hefty annual fee and renewal fee as well. The benefits that are provided may not even be necessary.
Additionally, certain cardholders treat their credit card as a source of money. It has to be understood that owning a credit card is similar to procuring quick loans. It needs to be paid off at the earliest and in full else interest will be charged on these purchases.
A washing machine or refrigerator may seem affordable initially, but as the days add up, it will become more expensive. Unless individuals can pay the same, credit cards should not be used in such a manner.
Ideally, an individual must only borrow 20% of their annual income. Therefore increasing one’s credit limit should not be an option that is frequently explored.
One of the biggest mistakes that are made by cardholders is using their credit card to withdraw cash. The interest charged on the same is excessive and therefore must be avoided at all costs.
#3. Paying The Complete Credit Card Amount
Credit card users are provided with easy ways to make their payments. They can pay only the minimum amount that is due or can pay the entire bill amount in total, which is recommended. Who is in addition to paying the card fee as well, if applicable?
It is important to note that if cardholders pay an amount less than the entire bill amount, who will charge an interest rate.
If they are unable to pay even the minimum amount due, it would be considered a credit card default, which can also affect the credit score and attract a fine. It is convenient to assume that paying the minimum amount due is enough each month.
However, keeping in mind the rate of interest charged, the total amount that is to be paid will balloon up to almost double the original bill amount that was to be paid. Hence, cardholders must always try to pay their entire bill amount in one go.
#4. Keeping The Track of Credit Card Payments
Paying a credit card bill in full before the due date is ideally the best way to use a credit card. Although individuals can pay just the minimum amount that is due and get away with it, it is not recommended.
Who is because paying the credit card bill in instalments will rack up interest that can add up to a substantial amount in time.
Additionally, not paying the credit card bill before the due can also add up interest. This amount varies from bank to bank, but it is important to note that this adds up to a substantial amount.
Also, cardholders should note that the interest will be charged on the total amount from the date of purchase.
Certain banks will also charge a late payment fee. These factors may not seem all that serious initially. Still, if the interest rate and additional fees start getting added up within a short period, the individual will start getting deeper into debt.
It is important to note that getting out of a debt trap is not accessible by any means. Getting into a credit card debt is by no means complex, as a few careless purchases and undisciplined payment methods will ensure the same.
It is getting out of a debt that is the issue. Hence, it is best to follow specific tips to avoid debt. However, suppose an individual has gotten into a credit card debt.
In that case, there are specific ways to get out of it, such as borrowing from family and friends to pay off the loan, availing a personal loan, keeping track of expenses, utilizing credit card balance transfer option and so on.
Healthy credit practices will ensure a good credit score and ease of borrowing in the future.
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