I remember getting my first credit card. I thought I had finally made it as an adult! That was over 30 years ago, and I can still remember my first purchase. It was a long navy blue wool winter jacket.
But what I’ve realized (now that I am much older and wiser), is that getting a credit card is one thing. Using it effectively is a totally different story.
The Good and the Bad of Credit
Obtaining credit is like applying for a loan. You ask the financial institution to lend you the use of its money. For that privilege, you get to pay them “extra” money (if you don’t pay off your card entirely each month before the due date). The terms of your agreement with the financial institution state the rate of interest – that extra money you agree to pay the company that issued the credit card.
You have the ability to make major purchases when you don’t have cash available for them.
You feel safe in knowing that should emergencies arise, you have the means to pay for them.
You don’t have to carry a lot of cash around (especially if you are travelling out of country).
Easily available credit makes it so easy to over-spend. (This is a BIG deal long-term!)
You negatively affect your credit rating if you don’t pay your minimum balances on time.
Most everyone falls into the trap of not paying off the whole amount you owe. (This means you are paying that “extra” money on the item each month until you pay it off.)
Creating credit debt can result in a debt load that is very difficult to sustain.
Credit Costs You Money
It’s very easy to get caught up in the “I can afford the payment so it’s okay,” mentality. But let’s take a look at what that is costing you.
If you add just $250 a month in charges to a credit card with an opening balance of $2,000, and make all your minimum payments, your credit card balance will balloon to $20,000 in just over seven years! What!! Yes this is the real cost of credit.
Most credit card companies charge 16 – 20 % interest. It may not sound like much, but over time is will cost you thousands and thousands of dollars.
Recognize When You Are Heading For Credit Trouble
Here are some warning signs that your credit is getting out of control:
You find yourself paying with cash less often and charging more and more to your cards.
You postpone payment for a month – letting some bills slide.
You make only the minimum payments each month.
You apply for new credit cards when you max out the cards that you have.
You use a cash advance from one credit card to pay your minimum balance on another. (This is really not good as when you take a cash advance, you are paying interest right on that amount right away.)
Tips To Reduce Your Credit Costs
If you’ve gotten yourself into debt trouble, it sometimes seems daunting to claw your way out of it. But it can be done! It may seem like you are sacrificing, but your future self will definitely thank you.
- Use your credit cards only for necessary items. Don’t charge for purchases such as vacations, liquor, toys, and beauty products. If you can’t pay cash, ask yourself if you really the item at that moment.
- If you are making a major purchase, choose a card that charges a lower interest rate.
- Pay the entire bill on every credit card each month. (If this is currently impossible, create a plan to pay it off as fast as you can.)
- Reduce the amount of credit available to you. Cancel cards that you really don’t need. (This takes the temptation away to use them – because you can’t!)
- Pay off all outstanding credit card balances before taking on further debt.
- Pay off the cards with the highest interest rate first.
- Think about getting a second job. Use all that income to pay off your debt. Here are some legit companies that hire remote workers so you can work from home at these jobs. That might make it easier to work that second job.
Having credit is a double edged sword. It’s great when you can control your spending and pay off your balances. But when it’s controlling you, you will have over-payed for those items you likely didn’t even need and cause yourself much unwanted stress.
Make the decision to spend wisely and keep more money in your pocket – rather than giving it to those financial institutions.
Do you have a story about getting yourself out of debt? We’d love to hear it and perhaps feature you in an article. Leave a comment below, or email us at firstname.lastname@example.org