Credit cards are certainly a trap for people who are struggling to make ends meet and finding difficulty managing their money. They are so easy to get and so easy to use. They are so widely accepted these days that you don’t even have to think of saving cash before you buy something. No matter what it is you wish to pay for (purchases, shopping, bills, invoices etc) you can just pay by credit card. It is just so easy to spend today without thinking about the consequences of how you are going to repay the debt tomorrow.
Here are some traps and pitfalls of credit cards that you should be aware of:
Fees and Charges
Review the terms and conditions of your card/s and ensure you understand the fees, charges and interest rates payable on your card/s. Sometimes there are additional charges that aren’t outlined on the advertising for the card.
Beware of the Low Interest Rate
Generally if a credit card is offered at a very attractive low interest rate it has terms and conditions around it including:
- The time frame for the low interest rate e.g. 12 months, 6 months
- What the low interest rate applies to e.g. whether it is for new purchases or for balances of other credit cards rolled into the new card
- How much you pay per annum to have the card e.g. an annual fee
Automatic Increases to Your Limit
Some banks or financial institutions will write to advise that you are eligible for an increase in the limit on your credit card. This is not an honoured privilege stating that you are a preferred client but rather a clever marketing strategy. Before you consider accepting this offer ensure this is really appropriate for your individual situation and that you can handle the temptation of having new available funds. In some instances, an increase may be acceptable as the new limit may provide a buffer in the event of an emergency. However if the credit card is already too much of a temptation an increase in the limit could be dangerous.
Receiving Unsolicited Mail About Credit Card Applications
You may receive mail from other credit card companies with pre-filled in credit card applications. This is not an indication that you have been selected as their preferred new client but rather a clever marketing strategy. Is your current card and limit acceptable? Do you really need this new card? Getting another card is not a good strategy or the solution to managing your existing debt. Shred the letter and don’t give in to temptation.
Using the Credit Card for Everyday Living Costs
The problem with using credit cards to fund your living costs is that it is easy to overspend and blow the budget which will drive you further into debt. A credit card is a flowing tap of money which can be hard to turn off. It isn’t until you get your monthly statement that you realise how much you have spent and by then the damage is done.
Debts and Limits Affect Your Ability to Borrow Money
When the banks and financial institutions assess you for a loan (such as a home loan, car loan, personal loan etc), they will take into consideration the limit/s on your credit card/s. If you have several credit cards or one card with a high limit this could affect your ability to get a loan for something that is really important to you such as your first home.
FlyBuys / Frequent Flyers / Reward Programme
Often people are enticed to use credit cards to increase their FlyBuys / Frequent Flyers / Reward Programme points. The benefits of FlyBuys / Frequent Flyers / Reward Programmes need to be weighed up against the costs of using the credit card (such as overspending, interest costs on the card, the sacrifices required to get out of debt etc).
A lovely quote to share: “A credit card is an anesthetic which simply delays the pain” – Helen Mason
Try managing your money the good old fashioned way. Save cash for something you wish to buy, so you aren’t tempted to use the credit card and fall prey to the many traps and pitfalls which so many fall into.