It generally sneaks into your world in small quantities and grows big. You end up getting caught off guard.
Imagine you are planning to take a loan to buy a car. The amount you are borrowing is generally around 10,000$. Since it a large amount you tend to stop and think through the implications of the loan. How much will be the interest? How much would i need to pay every month and so on. But credit card debt generally starts in a different way. You end up not paying your card balance this month. Its only around 500$s. So you feel you can catch up the next month.
Oops, you cannot pay it off this month too. But thats fine, its only around 1000 bucks now. I can pay it off next month. Unfortunately for many, this cycle just continues. As a result, a huge credit card debt :(
Also the interest rates on credit card debts are huge! When we apply for a credit card, we generally dont pay too much attention to the APR/APY the card charges. We are blinded by the bells and whistles around the card more than these important financial details. Does the card offer cashback? Does the card give me great travel points? Does the card give me initial bonus? etc etc. The only time we realise the actual interest rate on the card is when we fall into their debt trap.
So it is very important to understand the dangers of using credit cards. In fact if you cant control your shopping instincts or if you are a person who is given to a lot of impulse buying, credit cards are the worst idea for you. You don't really realize how much you have spent till the month end. Its the opposite of financial planning and budgeting.
I have heard experts even advising to freeze credit cards to avoid these situations. When i say freeze, literally put your plastic in a bowl of water and stick the bowl in the freezer :) That method sure works!!
But credit cards can actually also be a powerful ally in your financial journey. That is if you know how best to use them. I will explain why in my next post.
To utilize the power of credit cards, it is a must that you know what problems it may create and it is a must that you are capable of controlling your financial behavior.
- You should not use credit cards if you are impulse buyer
- You should not use credit cards if you do not monitor your expenditure on a daily basis. You will only realize at the month end how a number of small transactions can result in a big bill
- You should never put off paying your balance. Pay it off in time to avoid the interest rate they charge
- If you get into credit card debt, then freeze your cards immediately!! you do not want to add any more to that debt. It is very tempting to buy stuff on your card even when you know you cannot afford to pay for it at the month end.
Keep these rules in mind when you shop around for plastic! We can reap benefits from this plastic if we follow these rules.