Avoiding Credit Card Debt
Credit cards have great utility. Used wisely, credit cards help you accomplish many things, including the very important task of managing your cash flow. Indiscriminately used, credit cards can plunge you into a debt hole so deep you could get trapped for years.
Debt does not stay as just a money issue but can rip lives apart. At its worst, the pressure of debt could expose personal and family relationships to enormous stress. So you don’t reach that point it’s worth thinking how to use credit cards responsibly. Cherish credit cards for the convenience they can provide, but do not allow yourself to get carried away. Here are some handy tips to consider.
• Avoid making minimum payments. Try and pay the balance off in full each month if you can. This is the best way to minimise interest charges. If this is not possible, always pay substantially more than the minimum repayment. Credit cards set their minimum payment at only 1.5 to 3 percent of the balance you have outstanding. At say 2.5 per cent, this is only $25 for every $1000 in your account. Even if you were repaying with no interest or fees it would still take over three years to pay off the principal balance. When you include interest (average APR is 16 per cent) and fees, why, you would need at least 11 years to clear the $1000 debt. To have a good idea of the impact of higher repayments, search online for a debt repayment calculator.
• Arrange for a lower credit limit. The credit limit allowed on credit cards is not meant to be taken as an obligation to spend that much. These invites are like an invite to place yourself into debt, take a stand and call your card issuer and request a lower limit that you know you can control. Set it at a level that you can comfortably repay.
• Avoid making late payments. When the card issuer does not receive your payment on time, they will hit you with late-payment fees on top of extra interest. The expense is totally avoidable on your part. In addition it adds more to the money you owe.
• Pay early. Aside from protecting you against late-payment fees, this works to your benefit if you usually carry a balance. Most credit cards use the average daily balance method to calculate interest. By pay money off earlier in the month you will lower your outstanding balance throughout the month and cut back on the interest due.
• Monitor your spending. All credit cards provide online services. You can use these to check how much you have spent during the month and the amount that will be included in your statement for the month. This gives you enough time to prepare for the payment when it comes due.
• Stay away from cash advances. If you are making cash advances from credit cards more frequently, you really need to review your budget. Cash advances are expensive. A transaction fee is levied at the outset, and this can run to 3 per cent of the amount. There is no interest-free period on cash advances and the interest rate is often higher than that for purchases.
• Select the best credit card for you. Your credit cards should suit your paying behaviour. If you normally pay off your balance in full each month (called a “transactor” in the industry), the interest rate on your credit cards won’t matter at all; instead you’ll want longer interest-free periods and probably a rewards program. If you don’t usually pay your bill in full each month then a card with low interest rates will be the most important. Be honest with yourself: if you’re a revolver, choose the appropriate credit cards.
Manage the way you use your cards and use these tips and tools to help. They can be very handy tools in achieving some of your goals.
This finance article is by lowinterestcreditcards4u.co.uk Director Richard Greenwood which compares cards and products including Reward credit cards. Visitors can compare products side by side and then apply online.
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