A lot of us have fallen down the credit card trap. After all, this is one of the most preferred payment methods by consumers. You can’t really blame them for thinking that way. Using credit cards will give you another level of security. Some offer a warranty if you use a credit card to pay. Others have rewards that you can really benefit from.
While using a credit card may be convenient, it’s also very easy to abuse. It feels like an extension of your wallet. You think that since your name is on the card, you are spending your money. So you are more reckless when you use it. This is probably why the average balance of credit cards is almost $6,200. And this was at the beginning of 2020. Imagine how much that has already grown after the pandemic and recession?
Stop thinking that you are using your money when you use your credit cards. This mentality is what makes most of us fall down the credit card trap. The truth is, you are spending the creditor’s money. Whatever amount you charge to your card will be paid back – with interest. So if you think about it, the convenience brought about by credit cards comes with a price – the high-interest rate.
This does not mean you should stop using your credit cards. No. It does come with benefits. Like the rewards program that can help you save money and get freebies. You don’t have to miss out on these. You just have to learn how to avoid the credit card trap.
Tips to avoid the credit card trap
According to one survey, almost 8 out of 10 credit cardholders are worried that they won’t be able to meet payments. The combined effects of the pandemic and the recession have taken a toll on the finances of the average American. Even if you had enough emergency funds, that would have been severely depleted by now. Especially if you were one of those who lost their job or business. Although the government tried to help save the economy and every household through the stimulus package, it’s not enough.
This is why a lot of consumers started to rely on their cards. That can easily push people into a credit card trap. What can you do if you don’t have a choice? Here are tips that will help you use your cards properly.
Budget your credit card use
Start by making sure that you align your credit spending with your budget plan. Take a look at your current financial position and see what you can really afford to spend. You need to be realistic about this. That means you have to scrutinize what you’re spending on a monthly basis. Find out what you can do to lower your expenses so you don’t have to rely on your credit cards.
But in case you do have to rely on it, make sure that you include your credit card spending each month in your budget plan. That way, you can determine the fund that you will set aside to pay off the debt. Once the billing statement arrives, you have to use this fund to try and pay the balance in full.
Know your credit limit
It’s also important for you to keep an eye on your credit limit. Maxing out your credit card will lead to penalties and charges that will just make things worse. Not to mention the fact that once you reach that limit, your balance would be very high. It would be very hard to pay it back.
But this is not the credit limit that you should be watching out for. If you set a budget for your credit card spending each month, that’s the limit that you should avoid. It’s not the limit set by the credit card company. It’s the limit that your budget plan can afford.
Make sure every card has a purpose
It’s easier to be a smart credit user if you are monitoring one credit card. But what if you own more than one card? This is what a lot of Americans are facing. Most of us own more than one credit card. Why? Because we use it to get rewards from different stores and establishments.
While the cards may have been offered so you can enjoy a specific reward, check if you’re still able to benefit from that. A lot may have already happened since you first got the card. If it no longer serves a purpose, you might want to consider closing the cards that don’t have a purpose in your monthly expenses.
Be conscious of your credit utilization rate
Finally, you have to be conscious of how much you are spending on your credit cards. The moment you stop monitoring, you put yourself in danger of falling into a credit card trap. To be specific, you have to monitor the relationship between your balance and credit limit. Ideally, the limit that you should keep an eye out for is what your budget can afford. But even that should be measured based on the acceptable credit utilization rate – which is 30%. So if your combined credit limit is $10,000, your balance should never go beyond $3,000 across all your credit accounts.
How to get out of a credit card trap
What can you do if you are already in a credit card trap? Don’t worry, your situation is not hopeless. You can get out of debt. It will take some time and a steady commitment from you. But you have to persevere.
You see, getting out of this trap will take time. At the least, you need a couple of months to completely get out of debt. It will be longer if your balance is high. So make sure you approach this with dedication. That way, even if you are forced to make sacrifices, you won’t falter in your efforts to deal with your debt situation.
Fortunately, there are two things that will help you accomplish this goal.
Negotiate with creditors
Being in a credit card trap means you have accumulated a lot of debts. Do you have to pay it all back? Yes. ideally, you really have to pay everything back. At least, this is usually true for the principal amount that you borrowed. But you can negotiate with your creditors to lower the interest amount that you have to pay. If there were penalties or other fees invovled, you can also negotiate that they waive these. This will make your debt payments smaller.
If you can prove that you are in a financial crisis, you can even negotiate to have your actual balance reduced.
In case you’re not sure how to do this, that’s okay. There are rules during credit negotiation that will guide you in doing this task. And if you’re not confident in your ability to negotiate, there are also trustworthy debt experts that can help you out.
Change your spending habits
Paying off your debts is for nothing if you don’t deal with the real reason why you fell in a credit card trap. Your spending will have ot be scrutinized if you want to manage your debts properly. Make sure that your budget is updated and aligned with your current financial situation. Include in your budget plan some of your financial goals – like paying off your debts, saving more, etc. These will help you fund these goals so you can reach it.
When your finances are tied up to your funds, you’ll be more cautious of how you spend your money. It’ll make you think twice about spending on unnecessary things – because you know there are goals that you should be paying for instead.