Do you remember when Sarah and Steve told you about their crazy credit card debt the other day? How could they reach $20k debt when their limit was only ever 1k? Silly Sarah and Steve missed repayments, accumulated late fees and accrued a ridiculous amount of interest charged on top of their purchases. Now they owe far more than the value of the goods and services they bought in the first place. Oof. What a predicament.
So if this is sounding all too familiar, stop what you’re doing, take the credit card out of your wallet and throw it out of reach in the freezer with the peas and apple pie. Because you need to address bad spending habits and misuse of your credit card immediately.
Your credit card should really be for a rainy day. Save it for emergencies or for big ticket items you just don’t have the cash for immediately but have a good solid repayment plan for that item alone.
If you’re more interested in accumulating points and signing up to credit card reward schemes, it doesn't discount your responsibility. In fact, you need to be even more vigilant about the uway you use your card. Because after the honeymoon period is over or the first 20-50 days interest free per month concession, the interest charged will likely be super high.
Ok, so you want to avoid Sarah and Steve’s mistake which is great. But let’s get serious. Credit is dangerous when not used correctly. Let’s have a look at a few ways you can stay in the black and keep well out of the red:
|You can easily keep track of your debt if you repay your debt as soon as you’re able. If it’s the same day you used your credit card, then you’re winning. End of week is great too. But if don’t repay till the end of the month, then you leave yourself open to: a) overspending b) missing the due date and thus attracting a late fee.||Avoid spending more than 30% of the value of your debt. That way, you can never be so much in debt that you can’t repay it. If you’re struggling to make repayments, aim to make at least the minimum each month until you’re back on your feet again. Just remember, if your limit is $1,000 and you spend $300, you’re better off struggling to repay $300 than if you were struggling to repay $1,000. The interest alone over a course of time could reach in the hundreds on a 20% interest rate.|
|Keep your credit card at home as often as you can to avoid spontaneous spending. But if online shopping is the culprit, you need to have an honest discussion with yourself about keeping your credit card balance in a healthy state.||Woot woot. It’s sale time. And you want everything. After all, money makes the world go round. Why should you stop the mechanics of our first-world consumer society. Hmmm. Put the brakes on right there. Just because you’re used to grabbing bargains when you see them because they’re sooo worth it, doesn't mean you have to. Think about saving more and spending less and start using and wearing what you already have. If it means breaking old bad habits to create positive new ones, you may find new ways of investing your savings rather than spending them. Don’t wait to the due date to pay your minimum requirement. Set up a direct debit to pay your credit card so that you can avoid late fees. Try paying more than the minimum to reduce your debt faster.|
|Set up online statements. Pronto! Not only are you reducing redundant paper, clutter and helping the environment, but you could also be saving you on average $2 per statement. Might seem like a small amount, but who wants to give money away?||Using your card to buy the necessary items? Milk, bread, takeaway coffee? Time to stop. If you’re using your credit card because you’re short of cash and struggling to make ends meet, putting yourself deeper into debt will not help. Think about the adjustments you can make to let yourself breathe easy. Have a garage sale, sell items around the house you don’t use anymore. Even multiple $5 items add up and may cover your week to week essential items till you get back on your feet.|
The pros are so obvious but we’ll talk about it anyway. Freedom! A credit card can give you financial breathing space, especially when you have big ticket items to pay and your weekly wage just won't cover it. But the financial freedom of using a credit card doesn’t come without a catch. Let’s look at the positives and negatives a little closer:
|Flexibility to buy goods and services exactly when you need them rather than taking the time to save for them.||Risk of falling into the debt trap. If you don’t manage your debt properly you could see yourself paying more in interest than the item is actually worth.|
|Universal access. This could almost mean that a credit card is like a universal currency. So it doesn't matter where the card was established, you can use it wherever you go. What you need to be aware of his hikes in fees for every purchase plus, expect to be charged a currency exchange rate fee on top.||If you get in the habit of carrying your credit card around and not much else, and come across a business that don’t accept credit cards, expect to pay heightened fees if you need to withdraw cash at the ATM. The rate is exorbitantly high at 20% or more on the amount you withdraw.|
|If accumulating reward points is your agenda and you can afford to repay your purchases the day you made them, then this is a great way to receive some benefits on the side. If they’re there to be had and you can afford to repay asap, take advantage!||Not enough cash in your bank account to pay for that new flat screen? Then you probably shouldn’t make that purchase. Unless you’re absolutely certain you can repay the cost of the flatscreen by the end of the month, do you want to risk going into debt with more than the token TV? Once you start using the liberty and freedom of your credit card, it can be quite addictive or at least give you the false security that you have more money than you can budget repayments for. Always be realistic about the things you need vs the things you can afford to avoid the swirling black hole that many Australians suffer as a consequence of purchasing beyond their means.|
Remember: Avoid using your credit card and opt for cash. If you don’t have the cash, consider not using your card at all. If you need extra help working out your repayments for your current credit card debt, use Mozo’s credit card debt repayments calculator.