There may come a point in your life when you feel the need to take a loan. This could be for various reasons, to cover expenses that you don’t have the money for right then. Taking a loan is a normal practice followed all over the world.
A loan can help you get through difficult phases in life by providing the necessary cash you need for emergencies. But there is a downside to loans as well. They come at a cost, and some sources of funds charge a lot more than others.
Credit cards give you the freedom of borrowing money up to a certain limit to pay for any purchase you deem necessary. But many users forget to pay or are unable to pay their dues on time since they don’t account for immediate repayment of the borrowed amounts.
They end up paying exorbitant amounts as penalties and interest charges. One of the financial traps that many people unwittingly fall into is credit card debt, when they’re unable to pay these extra interest charges.
Credit cards are both beneficial and dangerous, depending on how you use them. The following is a list of lessons that you can learn from these cards.
1. Be Sure of Paying Back on Time
One of the most important things to keep in mind before charging any expense to your credit card is that you must repay the amount within a certain date as determined by the bank. Bank charge extremely high interest rates on unpaid amounts.
This point is vital. Use your card if and only you feel confident of paying off your dues on time.
If you feel you will not be able to afford your repayments at the end of the month, don’t use your card. As the saying goes, it’s better to be safe than to be sorry.
2. Budget Your Finances Every Month
Budgeting is a very important activity and you should consider making it a habit. Budgeting your expenses can help you find out exactly how much you can spend in a particular month.
In case you have to use your credit card, calculate how much you have to pay the bank at the end of the month and include this in your monthly budget.
Budgeting can help you avoid spending more than you should. With credit cards, it is easy to spend recklessly, and this is dangerous because you’re spending money that isn’t yours.
3. Be Careful When Using Money That’s Not Yours
When you have a certain amount of credit that you can use on your card, you are always tempted to use it. It almost feels like products and services are calling out to you to buy them.
But always resist the urge to spend unnecessarily. It is okay to splurge once in a while, but reckless spending using your card can get you into serious financial trouble.
Just because your bank extends you a high credit limit, you don’t have to compulsorily use it. Be wise regarding credit facilities. Use them cautiously.
4. Don’t Count Your Chickens Before They Hatch
In other words, don’t pay for something unless you already have the money for it. This doesn’t mean you should never use a credit card.
If you have a regular income, you are free to use your credit facility, but up to the extent of your monthly expense budget (and up to the credit limit you are granted).
In case you have irregular income or if you expect a certain amount of cash to flow into your bank account, don’t make purchases using your credit card till you actually get the money.
5. Good Cash Flow is Better Than Assets
Most of us make purchases based on our needs. But when it comes to our wants and products we don’t really need right away, we still convince ourselves that it is okay to buy them since we are investing and creating assets.
While this may seem to be a good argument, you should also bear in mind that a steady cash flow is much better than creating assets. You need a regular inflow of cash to pay for your daily and monthly expenses.
Buying too many things using your credit card leaves you with a high repayment amount at the end of the month. This may leave you without the money you need for other monthly expenses.
6. Use Your Card Only for Practical Purchases
If you want to spend using your credit card, make sure you use it only for practical purchases – things that you actually need. More often than not, your needs cost much lesser than your wants.
Differentiating between your needs and wants helps you spend wisely. Leave the bigger and more expensive purchases for when you actually have the money to spend.
Adopting a practical approach to finances can help you avoid getting into debt.
7. Debt can be a Vicious Cycle
With so many loan options available today, they may seem to be an attractive way of getting through financially difficult times.
Banks offer attractive credit card sign-up promotions and repayment schedules, which make them look like the best solutions to your financial problems.
While loans can help you immensely, they can also become a huge burden if you don’t handle them properly. For many people, one loan leads to another, and it continues till they’re neck-deep in the vicious cycle of debt.
Credit card debt in particular is one of the most dangerous since the interest rates are shockingly high.
8. Nothing in Life is Free
You don’t get anything for free. Everything has a cost and the cost is borne by either the seller or the buyer. Many credit card companies advertise low rates of interest or in some cases, zero percent interest.
You should remember that banks don’t offer money as charity. They are businesses, and for businesses, making profit is the main aim.
When you choose a credit card, look at the Effective Interest Rates (EIR) rather than the advertised rates. EIR shows you the actual cost of your borrowing since it accounts for other charges such as processing fees and late repayment fees. EIR is almost always higher than the advertised rates.
9. Paying Instalments on Time Improves Your Credit Score
One of the biggest advantages of paying your credit card dues on time is that it reflects well on your credit score. A good credit score makes it easier when you apply for other loans such as personal loans and home loans.
Banks consider your credit history and credit utilisation when they approve your loan applications. Keep in mind that missing out on even one monthly repayment can impact your credit rating adversely.
10. Other Loan Options are Cheaper
Credit cards charge some of the highest interest rates in the financial sector. If you need emergency cash and can wait for a day or two, look at other options such as personal loans. Personal loans carry much lower interest rates.
If you’ve accumulated a lot of debt on your credit cards, you can consider using a personal loan to pay off your card dues. Many banks also offer card balance transfer facilities to pay off these card debts.
Credit cards are a great way to pay for your expenses. But they can become a heavy burden to bear if you don’t use them wisely. Use your card wisely and make sure you spend only to the extent that you can comfortably repay.