How To Avoid The Credit Card Trap
Credit Cards have become essential to how we tend to conduct our economic transactions. Credit cards certainly help increase the purchasing power of an individual. With the rapid increase in online transactions, the dependence upon credit cards also seems to have increased.
However, having a credit card does not mean spending beyond your capacity. People tend to rely too much on credit cards and spend beyond what they might be able to pay back. If you are unable to pay back the respective amount such a situation can lead you towards a debt trap. Hence it becomes increasingly important to use your credt card wisely.
In this article, we have provided some common mistakes that you should avoid in the credit card trap.
#1 Sticking to Budget to Limit your Expenses
A credit card can increase your purchasing power drastically, which can make you spend beyond your repaying capacity. Thus, budget plays a vital role to keep a check on your spendings. A budget allows you to stick to the plan and not exceed your spending capacity. It helps to plan your expenditures periodically.
To begin, make a one-month assessment of your income and expenses. If you don't have any idea as to how much you have spent within a month, keep track of everything you spend for a month. Then deduct your expenses from your earnings. If it's less than zero, you're spending more than you earn and need to minimize credit card spending or earn more to get your cash inflow.
#2 Classify Nature of Expenses
While spending one must classify debt raised using your credit card. To analyze, you can simply classify your expenses into two categories revenue-generating and non-revenue generating. An expenditure made on something that shall help you generate in the future is referred to as deferred revenue expenditure in accounting terms and vice versa.
#3 Extending Due Date
If you are unable to pay the outstanding balance on your credit card you can pay the minimum amount due. The minimum amount due is the minimum amount you are required to pay to avoid interest and late fee payment on your credit card. The minimum amount due allows you to pay a minimum amount to avoid interest and late fee payments on your credit card. This allows you to extend the due date for a longer period.
#4 Pay Your Credit Card Dues in Full
One way to avoid a debt trap is by paying off your credit card balance in full. Banks offer an interest-free period to the customers. The cardholders are not charged with any interest during this interest-free period. Therefore, if you choose to pay your credit card balance during this period you shall not be charged with any interest on the outstanding amount and credit card trap
#5 Reduce Number Credit Cards
When there are several cards on the roster to keep track of, it's also easy to miss a payment or have difficulty completing your payments on time each month. If you desire the discount, try a charge card, which offers identical benefits but avoids the debt trap by not accumulating a balance. There are several types of credit cards offered but it is important to apply for a the right credit card that suit your needs and requirements.
#6 Debt Consolidation
If you have accumulated debt from various sources then it might be beneficial for you to consolidate your debt. Several banks have debt consolidation facilities whereby you can consolidate debt on your credit card. E.g. HDFC Bank offers a consolidation facility whereby you can consolidate different loans on your account into one single loan. This way you won’t have to deal with different interest rates on your loans.
Alternatively, you can also opt for a balance transfer through which you can transfer the outstanding balance from one credit card to another credit card offering a lower interest rate. Many bank balance transfer facilities to the cardholder whereby you get charged with 0% interest during the introductory period.
#7 Setting up an Emergency Fund
You can build a fund to help you under unfavorable circumstances to help you get out of a debt trap. The emergency fund may help you cover your costs and expenditure. You'll be less likely to fall into the credit card trap if you have an emergency fund since you may use it to pay for things like auto repairs or medical bills instead of using your credit card.
Bottomline
Keep track of your income and expenses to see how you're spending your money. Remember that taking out a loan can be beneficial to you because it can help you handle your financial problems. Paying it down on time protects you from exorbitant interest rates and allows you to achieve your financial objectives.
You can always apply online for credit cards in India but one thing to remember is you aviod overspending as it may lead you towards toward a debt trap.
Additional Reading - Ways To Keep Track Of Your Credit Card Spending
