29 July 2011

How to avoid credit card debts

Credit cards have become a crucial part of man's life. They have bought a complete revolution in our life and spending habits by making our purchase and other transaction become easy and convenient. You don't have to carry bundle of notes to make a big purchase. The plus point of having a credit card is, you can you can track your expenses.

Before even getting a credit card take a minute and question your need for one, and consider how healthy your financial practices are. Are you actually managing your finances, or do you swing from month to month on pure chance and luck? Don't get attracted to just the benefits of credit cards. Because credit card makes you spend money without a foresight. This might get you into debt.

Take a look at what happened to Rehman, a middle class man who was trapped in Rs 3,000,000 debt. He got six cards and nine unsecured loans. He did his best to hide this fact from his wife and friends, but all in vain. His business was failing, so he started using the credit cards to withdraw cash, which he spent on everything from paying his staff to feeding his children. Rehman didn't realize that with most credit cards, high interest charges kick in immediately when you withdraw from ATMs. His feelings of shame prevented him from seeking help. During this traumatic period he was constantly haunted with thoughts of committing suicide and absconding. I am sure you would not want to be Redman's place. You can prevent yourself from getting into credit card debts.

But this doesn't mean you stop counting on credit cards completely. So as you use a credit card keep the following precaution in mind.

Avoid too many credit cards
Undoubtedly credit cards come handy during emergency situations and facilitate payments. But credit cards tempt you to spend without thinking and it is this reckless spending is what gets you into credit card debt that becomes difficult to recover from. Like Rehman who owned six credit cards and got into severe debt that he couldn't repay. Therefore it is best to just take one credit card and avail reward points on that so that you could encash the points quickly.

Have an emergency fund
We think that credit cards are used for emergency situation, but it is unwise to consider it as a general rule. Emergency funds are always beneficial. You could use these funds for any medical expense or a major car repair. You could avoid using credit cards here by paying in cash. Emergency funds should be used as a back up to face emergency situations.

Use credit card based on your recovery capacity
Avoid the mistake of using a credit card to buy things you really can't afford. Don't make a purchase if you can't afford to pay back the cash. Spending more than what you can repay is highly undesirable and could get you into credit card debt. And don't keep a credit card balance for more than six months. Because beyond that point, the compounding of simple interest can produce a very expensive balance to pay off. If you remember this what happened in Rehman's case. He didn't know with credit cards, high interest charges occur when you withdraw from ATMs.

Avoid cash advance withdrawals
When faced with any emergency situation, don not even think of making cash advance withdrawals. This is the worst thing you can do with a credit card. Rather have a smart spending plan and have emergency funds as a backup. If you have to use your credit card to get cash, there's probably something wrong with your finances. A cash advance is the early stages of credit card debt.

Avoid balance transfers
To avoid getting into credit card debts avoid balance transfers from one credit card to the other. Only if you have a valid reason like you transferring your balance because of lower interest rate then go ahead with it. Else your balance will shoot up due to balance transfer fee.

Make full payments in time
Pay your balance punctually every month. Even a slightes