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Avoiding Debt Accumulation:
Reasonable Use Of Credit Cards |
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| The key to avoiding credit card debt accumulation is to use them smartly. Knowing the problems that the use of credit cards causes, many would suggest avoiding using them at all but that is a useless advice. The market requires you to have a credit card if you want to access many of the goods that are offered. Thus, the solution is to use them smartly taking precautions to avoid generating excessive interests. |
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Selecting Your Credit Cards
First of all, you need to analyze what you are looking for on a credit card. It’s not the same to obtain a credit card as means of leveling your monthly spending because you don’t have a stable income than to use it only as a means of payment so you don’t have to carry cash with you. According to your needs, you’ll want to focus on certain credit card characteristics.
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| You’ll then may pay special attention to the annual fees, promotional periods, financing interest rate, penalty interest rate, balance transfer interest rate, credit line, credit limit, etc. If you will pay the balance in full each month, you won’t care about the interest rate that much and you’ll focus on the credit limit. If you plan to carry a portion of the balance from one month to the other, the interest rate will be essential. |
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Minimum Payments
Each month, you’ll have to pay your credit card balance. Though you are not required to pay your balance in full, there are minimum payments that you’ll need to meet. Smart borrowing dictates that you should never pay only the minimum payments as credit card issuers devise this amount to keep generating interests and thus make more money that way. In turn, debt will keep accumulating and compromise your income. |
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| Whenever possible, you should pay your balance in full. However, since that’s not always possible, make sure to pay a sum greater than the minimum payments. A smart technique is one that my father (who had a position on a credit card company) used to employ: The idea is to combine a higher payment than the minimum with a good budgeting technique that consists on using round numbers. Thus, you need to raise the minimum payment to match the last digits of the overall balance. Let’s analyze a few examples: |
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| Credit Card Balance |
$ 1864.54 |
| Minimum Payment |
$ 400.00 |
| Suggested Payment |
$ 864.54 |
| Remaining Balance After Payment |
$ 1000.00 |
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| You may not have that amount, but you still can do a small effort and pay more than the minimum payment this way: |
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| Credit Card Balance |
$ 1864.54 |
| Minimum Payment |
$ 400.00 |
| Suggested Payment |
$ 464.54 |
| Remaining Balance After Payment |
$ 1800.00 |
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| You only employ $64.54 more and you can still keep reducing your balance each month this way. Of course, you need to also moderate the use of your credit card. |
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Do Not Spend More Money Than You Make
The use of your credit cards should be restricted to your budget. If you don’t have the money to cope with the goods and services you pay with your credit card, then, you shouldn’t use it. If something unexpected happened and you are forced to use your credit card due to the lack of cash, then make sure to alter your budget for the next month by reducing your expenses dramatically so you can afford what you’ve spent in excess.
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| Getting cash advances with credit cards is only a last resort action, the interest charged for that practice is almost double the usual rate for credit card financing. If at all possible, apply for a loan instead and make sure the interest rate charged and the loan terms are reasonable. |
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