Credit cards can be a fantastic cashflow tool – provided you manage them properly. Compare credit cards – but be honest about your own spending habits before you sign up.
Credit cards are handy if you religiously pay them off each month, but this isn’t the case for some people. This form of unsecured debt has the potential to derail your whole financial life and the debts can mount up quickly if you are not super-disciplined.
The first thing to ask yourself is why you want a credit card. Yes it is a convenient way to pay but you need to understand that it’s not free money. Apart from payday lenders, it can be the most expensive way to borrow. With interest rates ranging from 12.69% to 25.45% and annual fees ranging from $0 to $395, clocking up buy-now-pay-later purchases on a credit card is a sure fire way to kick start a debt habit.
The second point that shocks most people concerns the minimum monthly repayment, outlined on their credit card statement. For instance, my credit card statement gleefully tells me that if I pay the minimum of $126 on my debt of $6,240, it will take me 38 years and 5 months. And not only that, I will hand over to the bank an extra $11,861 in interest charges for the privilege. Now that’s a scenario I could well live without.
The third trap with a credit card is that it is too easy to buy something you can’t afford. We live in such a disposable world with temptation all around us to buy stuff largely to please family and friends, it’s too easy to pull out the plastic. After all, it doesn’t feel like real money if it’s not cash or a debit card.
The secondary phase of the credit card debt vortex is getting another credit card to pay off the first one. It’s an ugly situation but one that, sadly, many find themselves in. Meanwhile, the interest rates make sure the debt keeps growing and becoming even more unserviceable.
Note that all of the above only potentially applies, of course, if you don’t pay your credit card in full each month. If you DO pay your credit card in full then good work – it’s a useful form of credit!
Despite the dire situation, there are things you can do to and by taking action swiftly, you can stop a small problem from becoming a much larger one.
The Sorted website advises immediate contact with your credit provider to talk about your options. And they key is to do it sooner rather than later. Also check out these handy tools for ways to shrink your dumb debt.