Credit cards are super convenient. They allow you to make all your purchases without having to carry a wad of cash everywhere you go. They also offer several benefits. You can accumulate points that can be redeemed for attractive rewards. More importantly, they are a great tool for building your credit. On the flip side, credit cards can get you into serious financial trouble if you’re not careful.
Credit card debt can have serious consequences on your short and long term financial health. Getting back on track from credit card debt is difficult. The key is to avoid it in the first place.
These 12 tips will help you avoid disastrous credit card debt.
Late payments are the #1 reason people get into credit card debt. When you don’t pay your bill by the due date, the cred card company will charge you late fees as well as interest on the outstanding. One late payment can have a cascade effect, making it increasingly more difficult to get out of debt.
If you keep forgetting to make payments by the due date, set up auto pay through your checking account. Alternatively, set email notifications or notifications on your phone.
You have the option to pay a minimum balance or the full balance every month. Paying the full amount you owe every month is the best way to avoid credit card debt. When you pay only the minimum, interest keeps accruing on the outstanding amount until it is fully paid off. Doing this one too many times can result in hundreds of dollars in added interest, sending you further into debt.
If you cannot afford to pay your full balance every month, you need to take a serious look at your spending habits. Cutting back on expenses is the only solution to staying out of debt.
More credit cards means higher credit limits, more temptation to spend, and more opportunities to get into debt. It also means having to keep track of multiple due dates and payment amounts with a higher likelihood of missed payments. Likewise, taking out multiple cards in a short time period can damage your credit score.
You need only one credit card to build credit. Two cards is the max you should consider owning. No more than that. Fewer cards makes it easier to manage your monthly bills and reduces the likelihood of getting into credit card debt.
If you do have more than one card, always pay off the most expensive card first. Then move on to the card with the next highest rate. This will help to reduce the interest that accrues on outstanding balances.
Your credit card may allow you to make large purchases without having to pay cash up front. But can you afford to pay that amount in full by the due date? If not, you’ll fall into the trap of paying only the minimum balance. By the time you’ve paid off the purchase you will have paid much more for it than the original cost.
Saving up for large purchases is the only way to avoid getting into this trap. Only use your card for things you can afford to pay off right away. This will allow you to get the benefits of the card without the risks.
Taking a cash advance is a short-term solution that comes with a very high price. You pay a higher interest rate on the advance amount in addition to exorbitant transaction fees. Worse still, there’s no grace period on cash advances. The interest starts accruing from the day you take the advance. It is one of the most expensive credit card transactions.
A far better solution is to save consistently towards building an emergency fund to cover any emergency expenses.
You don’t have to wait till you get your credit card bill to pay it off. Making payments on your card when you get paid has several benefits. First of all, it ensures that you don’t get tempted to spend that money on some other purchase. Instead, you’re putting it towards something you’ve already bought. How much of your pay check you should use towards the credit card payment will depend on your income and your spending habits. Taking some time to figure it out is worth it.
Another benefit of paying off your card early is that it lowers your credit utilization ratio, which helps build a positive credit rating. Last but not least, you will have only a small balance to pay off when the bill arrives.
Before you apply for a new credit card that’s offering a host of attractive rewards, stop and think. Most cards entice you with sweet perks and bonuses but the catch is you need to rack up a certain number of points to redeem the better rewards. This traps you into a cycle of buying more and more just to qualify for a reward. That too, you need to earn those points within a certain time frame or they may expire. This is a vicious cycle that can be difficult to get out of. If you’re not careful, it will send you spiraling into credit card debt.
Stick to your rule of one, maximum two credit cards. No more. If you are shopping for your first or second card, compare ALL features and costs, not just the rewards.
You may be charged twice for one purchase. Or you may be over-charged for something. This could happen by mistake or it could be the result of identity theft. Regardless of how or why it happened, if you don’t review your bill you will be paying extra unnecessarily and unknowingly.
Make it a habit to review your credit card bills regularly. If you see any entries you don’t recognize, call the credit card company and ask them to look into it.
Every credit card comes with its own set of terms, conditions, fees and rewards. Understanding the features of your credit card terms will help you maximize the benefits while avoiding credit card debt.
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