Friday, September 3, 2010

Credit card debt - how to avoid it.

It is a fact that many of us in our current society are accumulating a lot of debt due to credit card usage.

It is so easy to get a credit card these days. It is not only easy to get a new one but they also keep on increasing your credit limit.

The trick of the credit card is that you don't notice it as you use. The cash stays in your savings account and you may see all of your money there and decide to use it. Why not go for a nice dinner or why not buy that nice little product that some flash advertisement is being forced upon you?

As time goes buy if you continue to do that and only pay the minimum amount on your card, you will very quickly get into trouble.

Here is how it goes:

(1) You start using your credit card instead of your cash.
(2) When the credit card statement comes around you can't afford to pay it all of or, even worse, you can only afford to pay the minimum amount.

(3) Because you are using your credit card for most of your purchases, there is a whole lot of cash sitting in your back account. You then use that cash to buy stuff or have nice dinners and other things.

The cycle continues until you cannot afford to pay more than the minimum amount or, even worse, you can only afford to pay the minimum amount.

So the question is, how can you prevent this from happening?

(1) Always pay off the entire balance on your credit card at the end of the period.

(2) Save cash for big purchases. Don't use your credit cards to buy anything unless you have the cash to pay the entire balance off.

(3) Have a emergency fund. It is of vital importance that you have an emergency fund for ... I guess emergencies. If you are living from pay to pay you should save some cash to pay for emergencies such as medical or your hot water system breaking down. If you don't have an emergency fund then it is likely that you will use the credit card and then you will not be able to pay the balance off. The trouble will then start.

(4) Spend less than you earn. In other words, manage your cash flow properly. This not only relates to avoiding credit card fund but it is the single most important financial advice you can get.

(5) Cancel the cards you don't need. I don't like to give advice that says to cancel the credit cards. If you are in debt and you don't have an emergency fund it is probably a good idea to keep your cards in case of emergency. Having said that, if your cash flow allows you to comfortably cancel a card then go ahead and cancel it. You will fell better for it and it reduces the risk of you acquiring more debt.