Credit cards are a type of pre-approved loan which allows you to purchase goods and services up to the credit limit and then pay for them later on when the bill is generated. Thus, credit cards allow you credit transactions which do not require immediate payments. While you enjoy the benefits of the card, the credit transactions have a way of building themselves into a debt which, if not cleared within the stipulated time, attracts heavy interest rates and also damages your credit score. So, it is always advised to stay away from credit card debts. Do you know how you can do so? Here are some simple instances which have the potential of creating a credit card debt and possible ways of escaping them –
• Irrational spending on the card As your credit card allows you credit transactions you might end up overspending on the card or spending more than you can afford. When you do so, a large bill is generated later on which becomes difficult to pay. As you don’t clear the bill completely, high-interest charges keep accumulating which drive up the outstanding balance and creates a debt.
How to escape? Always make a budget and stick to it. Define your spending limit and make sure to stay within the limit. Use your card sparingly so that you are not tempted to overspend.
• Not clearing the bill Credit card bills allow you to pay a Minimum Amount Due (MAD) and then revolve the remaining balance to the next billing cycle. Though the concept of paying the MAD is helpful in a financial crunch, you should avoid it. Revolving the credit involves paying interest on the outstanding balance. Moreover, in the next billing cycle, whatever transactions you do don’t get an interest-free credit period. Such transactions are also charged an interest which ultimately creates a large debt.
How to escape? Always pay the bills on time and in full. Don’t revolve your credit and avoid incurring interest payments.
• Making big-ticket purchases on the card Many credit cards allow you the facility of converting your big-ticket purchases to affordable EMIs which are payable every month. These EMI conversions attract high-interest charges. Moreover, the purchase becomes a debt which you would have to service for months before it is paid off in full.
How to escape? Don’t make big purchases on your credit card if you cannot pay for them in one lump sum. Avoid the EMI conversion facility and buy only what you can afford.
• Having multiple cards Multiple credit cards mean multiple payments of credit card bills on multiple dates. This might become a problem if you forget the different dates. If any bill is unpaid, it would become debt and start attracting interest which would further enhance the debt payable.
How to escape? Consolidate multiple cards into one card for ease of servicing. If maintaining multiple cards, remember the bill payment dates. Arrange for auto pay or direct debit facility to avoid payment defaults. Using the credit card efficiently would give you good rewards. Remember these cases which can create an unescapable credit card debt and stay away from them using the tips mentioned above.
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