Thousands of people get into debt every year through their misuse of credit cards. They often see the amount of available credit on a brand new card and immediately think of it as extra free money they can gain access to and this mindset is invariably one of the main reasons why their reckless credit card spending comes back to haunt them later on.
The trend to consume more is greater than ever then there’s the power of advertising and the demands to have the latest and best ‘gear’ and this is not simply confined to your children’s attitudes to life. Even some parents are often guilty in their attempts to ‘keep up with the Joneses’!
However, managed and used properly, a credit card can be a useful additional resource which can help with cash flow which affects many families, particularly with children. So, what factors should you consider when using your credit card and what are the potential pitfalls.
A Sensible Approach
There are so many credit cards on the market today. Credit cards are big business and companies are so desperate for you to choose their particular card that they’re all coming up with ever more ingenious ways to tempt you into choosing them as your credit card provider. Some of these offers are so tempting that you can even start believing that they are almost giving free money away.
However, in order to use your credit card wisely, you have to start thinking like the lenders themselves if you don’t want to get sucked into their trap.
Firstly, the 0% introductory offers. We all loathe paying interest on our borrowing so an introductory offer of 0% interest on a credit card is a smart way of getting us hooked.
The important thing to remember however is that the ‘introductory’ period will end at some point so it’s crucial to make sure that you owe them nothing at all once the introductory period is over. That way, they cannot make any money off you in interest charges.
Pay in Full
Even if your card charges interest, you can simply avoid paying any by paying off your card in full each month.
Learn about your card’s billing cycle and, if you’re really clever with the timing of your purchases, you can sometimes take advantage of almost 2 month’s worth of spending the credit card company’s money before you have to pay your next bill.
The key is, however, to make sure that you can clear the entire amount when the time comes around to paying it.
That way, you won’t incur any interest. Therefore, if you intend to use your credit card to fund a more expensive purchase, only do so when you’re confident that your next statement has just been produced.
Change Your Card
Become a ‘card tart’. Credit card companies are not interested in you, just your money so why should you show any sense of loyalty to them?
If you’re unable to pay off your balance in full each month, take advantage of the introductory 0% offers of another card provider and switch your balance over to them.
That way, you won’t be paying any unnecessary interest. It’s important to check the terms and conditions before switching over though as some 0% interest offers only allow you to reap the benefit on new purchases on their card so you might end up paying even more interest than you were doing previously, if the new card’s APR is higher than your existing one.
And, if the 0% introductory offer is suitable, don’t just stop there. When that offer finishes, switch again to another 0% introductory deal.
What are the Pitfalls of Using a Credit Card?
Credit cards aren’t issued to give you added flexibility and convenience. They’re issued simply to make lenders money. If you keep that at the forefront of your mind, you’ll be able to take the right approach in terms of how you use your credit card.
The main ways in which companies make their money on credit cards is by charging interest and imposing penalty charges.
This article has already highlighted how you can avoid paying interest. As for charges, simply make sure that you don’t miss a payment and get your payment in to them on time.
Some card companies allow you to set up a variable direct debit which is the most effective way of ensuring your payments reach them every month on time.
Increased Spending Limits
Be wary of those increased spending limits. If you do not pay off your balance in full each month (though you should always be encouraged to do so), or if you are at or close to your spending limit, credit card companies will often sneakily raise your credit threshold to encourage you to spend even more.
Avoid falling into this trap. Remember, if you are at or close to your existing limit, this would seem to suggest that you have difficulty with making your existing repayments as it is so the last thing you should be considering is raising your limit to encourage you to spend even more!
In fact, if you find yourself in this position, call the card company up and tell them that you don’t want your limit increased and to reduce it back down to its previous level.
Never use your credit card for withdrawing cash or use the credit card cheques they often issue you with. You’ll be charged interest from the moment you pull the cash out of the ATM or the date from which the cheque is presented.
Minimum Payment Pitfall
One of the biggest pitfalls people get into is only making the minimum payment each month. If you do that, you’ll find that all you are basically achieving is paying off the previous month’s interest only and not making any real inroads into reducing your debt at all.
If this sounds like you, it’s probably wise to think about giving up your credit card and looking for alternative ways of paying it off such as through a personal loan where the interest will be far less.
If you do find yourself in this position, it’s necessary to draw up a budget and write down two separate lists of all of your income and expenditure.
Take a close look at all of the items you buy which could be classed as non-essential items. We all like to have nice things and we especially want that for our children but if we’re only making minimum repayments each month, it’s crucial that we separate ‘wants’ from ‘needs’.
Even showing your budget to your kids, if they’re old enough to understand, can help them to understand why it might be important to curb impulse buying and to save for things you want.
After all, you’ll want them to be sensibly educated and informed about finance matters for when they get older, won’t you? Another pitfall to avoid is having multiple credit cards.
It might appear that you only owe £500 on this one, £1000 on that one and a further £1000 on yet another one but, when you add them all up, the reality is very different and remember that’s multiple sums of interest the various cards are charging too.
Avoid taking out the company’s payment protection policy. Companies will use scare tactics to try to get you to take out their own payment protection policy like asking you how you’re going to make your repayments if you’re unable to work through being off sick or should you lose your job.
The problem is that many of these policies have hidden clauses and come vastly overpriced. You’re under no obligation to take out the company’s own payment protection policy and, should you decide you need payment protection, shop around for the cheapest stand alone policy which covers your needs for all of your borrowing commitments.
Even then, look out for hidden clauses in the small print. It might still not cover you if you’re self employed for example or if you have an existing medical condition.
Just keep in mind that all credit card companies are after your money.
Don’t be taken in by all the marketing speak and remember that if you can’t pay off all of your balance each month, then there are cheaper forms of borrowing available which may suit you and your family far better.