Avoiding credit card debt is extremely important in today’s world. Unsuspecting credit card users don’t follow the best practices for spending on their credit cards and end up in perpetual debt. The compounding interest doesn’t help either.
In this article, we are going to talk about 3 tips that will help you avoid credit card debt.
Rolling over: Understand what it is
Rolling over your balance might not be a good idea. There is generally an interest-free grace period. It’s 25 to 30 days in most cases. This grace period is at the end of the billing cycle before the payment is due.
Now, if you only make the minimum payment, then the rollover amount gets added with an interest. It can be as high as 26% annually.
Furthermore, any skipped or missed payment can further slap a penalty fee on you which ranges between S$60 and S$100 (sometimes even more) on top of the existing interest.
Lastly, you should know that regular revolving payment makes you lose the grace period for your card spending.
What does all this mean?
Well, in simple terms, it means that you will start to accumulate interest not just on the unpaid balance but also on the new purchases after the due date. This is a daily interest we are talking about.
Ultimately, this ends up having quite the snowballing effect. As you continue to use the card, the balance (your credit) keeps on growing at an ever-increasing rate, and that’s just bad.
Tip: Always make full payments for your card, for as long and as much as possible, to avoid mounting credit. This contributes to a good credit score and allows you to maintain a good utilization pattern for your credit card. Stop spending on the card if you already have a lot of uncleared balance and focus on paying it off first before you resume.
Reducing credit limit
Just stepping out into the wide world? So many opportunities, and that flashy credit limit of the newly approved credit card! Things can look very tempting. But always remember one thing –
Tip: Always spend less than what you earn.
It’s not rare to find people who have multiple cards and their credit limit, if added, exceeds their monthly income by quite an amount. But it’s important to understand that the credit limit is not your spending power!
It is more than likely that your credit limit is much higher than your monthly income. Your ability to repay is the only truth here. That’s the only factor to keep in mind, regardless of what your credit limits are.
What amount of your monthly income are you comfortable spending after savings and monthly expenses? That is your limit. Assess your spending capacity and act accordingly.
Also, are you thinking of just meeting the minimum payment requirement as you exploit that credit limit to its fullest? Grave mistake. See the first tip.
Exerting self-discipline is hard for most of us. That’s why you should reduce your credit card limit if it’s becoming hard to put a stopper on your shopping spree. Banks can be notified to adjust the spending limit. Once you have assessed your spending capacity, add some buffer for emergencies, and that is your new limit.
Now you can still enjoy all the perks and rewards of the credit card without ever worrying about going into a bad credit card debt.
Building an emergency fund
An emergency fund is much like a financial safety cushion in many ways. You should keep two to three months’ worth of your salary as an emergency fund. Emergencies can come without knocking. It can be the loss of a job or a loved one. It can be an illness or something entirely different.
An emergency fund helps you tide over any such unplanned phase or disaster. Having a good credit card balance from when you were in a better position also helps here.
Tip: Having an emergency fund makes sure you don’t rely completely on credit cards during times of crisis. Over-dependence on credit cards during such phases can be disastrous and also the quickest way to a never-ending credit card debt later on.
That being said, keep in mind that forming an emergency fund comes after any immediate or high-priority expenses, such as clearing existing debt or cash advance balances. Pay off those debts before you start forming your emergency fund. Don’t get into another debt while you are doing so.
Be the master of your cards. Don’t be a slave to them. Remember, they are just a tool to aid you in spending. Those credit limits aren’t compelling you to spend more. You are compelling yourself. Be careful and cautious, for credit card debt is one of the worst things to have to carry on your shoulders, likely forever.
Happy responsible spending!