How to Avoid the Dangers of Credit Card Debt?
Credit cards are potentially risky, especially for the new users who may be fascinated with the thought of “free” money. Even some experienced users of credit cards end up falling into credit card traps. If you are in the mindset of either getting a new credit card or dropping your credit cards – understanding the dangers tied to them can help you cultivate better habits. You should always remember, there is a responsible way to use credit cards, without falling into the traps.
Temptation to Overspend
We often tend to spend more when paying with credit cards as compared to when paying with cash. It is convenient and easy to spend money with a card, and you do not have to face the stressful situation of your cash leaving the wallet.
How to avoid: You should set a personal limit or budget on your credit card as per the amount you can afford to pay every month, even if it is lower than your actual credit limit.
Harder to Pay Off Balance With Interest
When you pay your credit card balances in full every month, you avoid paying any interest at all. If you do not pay your balances in full, then a portion of your payment goes towards the interest payments which in turn increases the time it takes to pay off your balance.
How to avoid: You should pay your balance in full every month so that you can save the interest charges. If you are unable to pay the full balance, you may be spending more than you should. However, you should pay as much as you can each month so that your balance comes down to zero at the soonest.
Going Deep in Debt
Any time you borrow money, you create debt. The higher is your borrowing, the deeper you dig yourself in debt. Debt can lead to a lot of problems that go beyond financial worries such as stress, depression and other health issues. Once you are in debt, your future financial goals get delayed as all your funds are dedicated to repaying the outstanding dues.
How to avoid: It is important to identify the signs of getting into credit card debt. The ideal option in such a case is to stop using credit cards and to concentrate on living within your means.
Risk of Ruining Your Credit Score
Credit cards greatly impact your credit score. If you use your credit card in a wise manner, you are on the path of holding a good credit score. But a single mistake – such as missing your payment, can cost you a hit on your credit score.
How to avoid: The best way to build or maintain your credit score is to pay your credit card dues on time.
Difficult to Track Expenses
The foundation for building a healthy financial life is to track and manage your expenses. However, adding credit cards to your spending can make it difficult to keep track of all your spending, especially if you are holding multiple credit cards, or cash and debit cards along with your credit card. This makes it easy for you to unintentionally overspend.
How to avoid: The more cards you use, the more places you have to look into for tracking your expenses. You can maintain a spreadsheet or a journal to track your expenses manually.
Risk of Credit Card Fraud
If you have credit cards, to some degree you are at risk of being a victim of a credit card fraud. Your card itself can be stolen, or your credit card information can be stolen. However, your liability in such cases is limited, but you need to be quick in reporting such charges.
How to avoid: You should monitor the activities on your credit card regularly and report any suspicious charges immediately.
The Bottom Line
If you wisely spend and manage your credit cards you will save yourself from the credit card traps and enjoy the perks that your card offers with a peaceful mind.