Credit cards good represent both prosperity and evil depending on how they are used. At the same time, credit cards are useful to have always with you, provide benefits and help to maintain a good credit history which is very important when planning future large-purchase.
While correctly using the credit card privileges may improve one’s quality of life, the reverse may cause accumulation of larger amounts of debts and the consequent financial pressure, which may take more than a year to overcome.
Understanding your credit card
But to ensure that such a card does not end up being a source of credit card debt, one ought to acquaint themselves with the basic workings of the credit card. A credit card is an opportunity to receive a credit from the financial organization up to the determined amount of credit limit.
This is set by the lender according to your credit standing that involves credit score, income, and credit score to income ratio. For one that uses the credit card, the user is supposed to repay the amount which has been borrowed plus other charges that accompany the card in case one does not make a complete payment before the due time.
How credit card interest works
Borne out of credit cards, interest, can greatly add to the amount owed if not well paid. The majority of credit cards contain a grace period , which often ranges from 14-21 days where one is not charged a_interest on the balance.
However, if the balance is not cleared within this period they attract interest on the amount still remaining. Interest is compounded on an interest-bearing deposit, using the amount in your Account each day as the balance.
Fees and how to avoid them
They also attract several charges like the yearly fees, penalty fees for delayed payment, and fees for moving balance form one card to another. However, consumers also bear cash advances fees and foreign transactions fees to think of. These charges are rather cumulative and may pile up to a rather colossal sum if you are not careful with your balance.
When you do your lesson, you should be well informed regarding the working of these fees so that you do not unnecessarily incur costs. While it is impossible to completely avoid these fees, one can decide on the right credit card and adhere to the conditions of its issuance in order to regulate such expenses and make them less frequent.
Common fees to watch out for:
- Annual fees: There are also credit cards which attract annual fees for the user to get to enjoy the convenience of the credit card.
- Late payment fees: Consumers agree to this because if they fail in making payment at the agreed time, they are charged a hefty amount of money.
- Balance transfer fees: Balance transfer occurs when one transfers a balance from one card to the other, this normally attracts a fee which is $5% of the transferred balance.
- Cash advance fees: Accessing cash through your credit card also attracts many charges as well as very high charges.
- Foreign transaction fees: Some credit cards make you pay charges that has to do with purchase in foreign currency.
Effective budgeting strategies
The most basic technique of eradicating credit card debt is setting and following a financial plan. A budget enables the planning of income and expenditure so that an individual can be able to live within the means of his pocket saving for future plans. Begin with the identification of sources of your monthly income and write all down.
After that, you have to list all your current monthly expenses such as; house rent or mortgage, electricity, water, food, means of transport, and others like entertainment among others. Do not forget your credit card payments that have to be paid on or before the due date mentioned on them.
Prioritizing expenses
This leads to meaning of expenses needed once you have determined your budget since expenses must be properly prioritized once you have a set budget. Housing, utilization and food are among the nominal expenditures that should not be compromised.
It goes without saying that these are also completely non-negotiable by virtue of being essential in one’s daily existence. Spend on luxury foods, cinema, clubs, buying clothes, shoes, bags, etc. , should be restricted if one wants to clear debts.
Always stick to the bare necessities and avoid unnecessary expenses and you can direct the extra money towards paying for your debts and therefore a better financial period.
Saving for emergencies
Based on the analysis, an emergency fund is a vital aspect of financial security. This implies that one can easily find himself/ herself with credit card bills if one lacks a backup to finance small emergencies like hospital bills, car breakdowns or house/ building hitches.
Such expenses can easily be covered from an emergency fund and this eliminates dilemmas of having to take loans and the monetary burdens that come with it. Ideally, one should try to accumulate the amount equal to minimum three to six months of living costs in a clearly accessible account.
Such cash reserve will bring about confidence and will act as a back up in the event of an emergency.
Paying your balance in full
This way, regular resolution of the credit card bill is possible, thus preventing accumulation of debts. This practice halts the addition of the interest to your balance, therefore reducing your level of indebtedness. Thus, you do not pay the high rates of interest, which are likely to impose themselves were you to pay only the minimum amount due.
To make this easier, pay through your bank or the issuer of the credit card, through an automatic payment method. This means that you are never bring late in making your payments hence a good pay record keeping, no late fines hence you are financially stable.
Monitoring your spending
If an individual follows the monthly spending in their credit card, then they are able to control their expenditure and also to identify any unauthorized payments made on their card. Almost all credit card companies have online access to your account, and there are even convenient apps you can download to keep abreast to your spending.
Conclusion
Living a credit card debt free life is made possible by strong will, foresight and good credit behaviours. This knowledge plus a development of a budget to control personal expenses and smart usage of the Credit card allows one to tap into the Credit product fully yet without being a candidate for a Loan shark.
It is time to recall that being financially sound involves being financially wise, thrifty and conscious knowing what to look for and avoid.