Why a credit card can be a bad idea for debt management
Credit cards can do more harm than good. If you weren’t aware of this before then it’s really time to put it into perspective. Credit cards not only tempt you to make exorbitant purchases, but they also can have high interest rates that are detrimental to your financial situation. Acquiring a credit card is exactly what credit card holders want you to do when you’re in debt. What they don’t tell you about is the loan sharks and harassing phone calls that could possibly await you when your cards get canceled and you’re left with an incredible amount of debt. As illegal as harassing phone calls are, they still happen in this day and age.
Bottom line, credit cards aren’t the answer to your debt problems. They only create more debt! Let’s look at an example of how a credit card can be detrimental to your financial situation. The average person has 2.7 credit cards to their name. The average amount of debt a consumer has to their name through their credit cards is way more than they should have. It runs into the thousands of pounds! If you don’t pay off what you owe each month the interest starts to pile up. How so? Well, credit card companies are clever. Let’s say you charged £1,000 in purchases. If you don’t pay back the full amount you charged on the cards, the full £1,000 within the grace period, then you would owe the interest on the full £1,000 in purchases until you paid back every cent. Even having 1 measly pound left in debt on the £1,000, after the grace period, would cause the full £1,000 to accumulate interest until the balance of the debt is paid back in full.
So you see, even having a measly £1 in debt from purchases can cause the entire £1,000 to incur interest charges. If you must own a credit card, which we highly disapprove of, then you must pay back every penny you owe within the grace period. Otherwise, all of the purchases, every single one, will acquire interest charges until it is paid back.
So you see, this is just one way that credit cards have you trapped. They know that the average person is never going to pay back within the grace period. You can be sure that they are counting on you making purchases that aren’t within your means. Anything you can do to save money without having to own a credit card would be a wise decision. Therefore ensure you check the small print to ensure your card has interest free purchases for a set introductory period.
Don’t fall into the credit card trap, and if you’re already part of it, check out more of our articles on how to save enough money to cancel them for good. We have tons of money saving tips and ways to live frugally. Not only that, but we show you how to live frugally and use it to your advantage. The more money you can get saved and invested, the better your debt situation will become.
To Charge or Not to Charge - The pitfalls of a Credit card
People always seek instant gratification in all things we do, from trying to lose weight to buying the latest gadget. It’s almost as if the child within us takes control and flips the logic switch to off the instant we see that latest gadget or clothing that we absolutely must have or the world will come to an end. You can actually visualize the kid in you stomping his foot screaming at the top of his lungs that he wants it now!
Coffee - Can be a daily expense - Do you really need it ?
So, you whip out the credit card, hesitate for a moment as your logic tries to take over, but it’s only for a moment as the kid gets louder and louder. Then a month later when your credit card bill arrives you blanch as you realize there is absolutely no way you can cover your shopping so you will have to just pay the minimum. Or even if you can pay the full amount why should you, right? After all you can use that money to buy something else.
Yes, there is a very good reason that the financial industry makes such huge profits and pays marketers and psychologists so much. The credit card is designed purely to take advantage of the human need for instant gratification and banks know that most people will not pay off all their monthly purchases because they can’t so the interest kicks in, which is usually obscenely large.
The other thing banks rely on is people’s love of denial. In other words, no one sits down to actually work out how much that new telly is going to cost them if they pay interest on it for five years. Let’s see, if that brand new, sparkling TV that is screaming your name costs £500, after 5 years at a rate of 17% you end up paying £750 in total. You end up paying 50% more for it at the very least, as this doesn’t cover other fees that pop up which you don’t notice.
Why not try a novel approach and cut out that Starbucks coffee you get twice a day and bring your coffee from home? That would average a minimum of £60 saved per month and there are plenty of other places where you can save a little extra cash so you can have the money to buy that TV in a few months without having to pay the bank for the “privilege” of getting it the day you see it. Who knows, you may even decide it’s not worth buying it after all because it was only an impulse at the time.
OFT look into credit card competition
The government’s OFT (Office of Fair Trading) will be looking into equality and competition within the UK’s over saturated Credit Card industry.
As spending on plastic skyrockets, major credit card companies will come under the watchful eye of the OFT, which will assess the fairness of business operations in the highly competitive, but unsecured consumer credit market.
The OFT recently made public its plans to deal with the knock on effect of the credit crunch, and how this has affected the financial services sector. One of it main priorities within the UK is to increase the overall responsibilities of lenders within credit card companies, to the obvious benefit of the consumer.
“With our focus on credit, we are addressing the area in which there is a real risk of short-term consumer harm while also ensuring that the sector that emerges from the current crisis is competitive and behaves fairly and responsibly towards consumers,” said OFT chief executive John Fingleton.
The G20 meetings, which were wrapped up last week, led to promises over improving the global financial services industry and to ensure tighter regulation on financial markets. The OFT however, have a big task in hand, ensuring that government changes to the finance sector don’t weaken the already problematic credit sector.
How to manage your Credit more effectively
Having credit is not all bad if managed correctly, whether it allows you to buy that dream house, get you out of tight spot or be used to build yourself a solid credit rating. Poor management however, are where problems can arise.
Some basic pointers when using credit:
- Only buy what you can afford to repay - One mantra i have always tried to use is this one. With the latest shiney gadgets, or must have accessories being paraded in our faces on a day to day basis, it can be difficult to resist the urge to spend. But, do you really need to make that purchase? The buy now, consider the consequences later attitude is not ideal when facing 16.9% APR charges!
- Make sure your payments are frequent and in full - If possible, always try to pay off your balances in full at the end of the month. Whether that is a credit card purchase, or your mortgage payments, the same rule applies. This enables you to both avoid any fees, and limit the amount of interest you pay to your credit supplier.
- Know your limits - If you have a £1,500 limit on your credit card, don’t go over it! You will probably pay through the nose for exceeding your limit.
- Keep track of your spending - Set up an online account that coincides with your credit card statements, that way you can quickly check your spend for that month and act accordingly. Most well known credit suppliers will be able to offer online account support.
- Keep an eye out for mistakes - Although many credit card companies offer insurance or protection against fraud, Credit card fraud does and will continue to exist for the foreseeable future. Keep a beady eye on your statements and check any unusual items out. Dont let any fraudulent purchases go unnoticed.
- Be sensible - Don’t apply for credit unless you really need it, or you are doing it for building your credit rating. Many people are under the impression they need credit, when in fact they don’t! Having that temptation there to spend can be problematic.
In the right hands, credit cards can be very useful, but unless you need to make a large purchase or are looking for the payment insurance - try and stick to cash or debit cards.
Cashback Credit Cards
Cashback Credit Cards - Earn while you spend
Money earned through cashback can range from 0.5 to 5%
Im going to start off my first Credit card post with one that will hopefully make your money work harder, and you will be rewarded for spending! If you require a credit card, or are a frequent user of your favourite plastic, then i would recommend a credit card with cashback functionality.
Normally, an average credit card will charge you interest based on your outstanding balance in return for you using the card - simple as that. However, in the battle win over new customers, some credit companies are offering you cash back for every time you spend on the card. The money is tax free, and can range anywhere from 0.5 to 5% of your spenditure. The secret to using such a card, is to use the card as much as possible on all of your purchases, but once your bill comes at the end of the month ensure it is paid off in full - and no exceptions!!!
Why pay it off in full each month?
If you don’t pay off your balance each month in full, you will be charged interest on that balance - effectively wiping away the main benefit of the card! Therefore, i would recommend that you set up a direct debit to pay off the balance, which will automatically debit your bank account the total amount spent each month.
These cash back cards also should rarely be used as a balance transfer card, as they usually come with high interest rates! The reason they offer cashback on yuor spending is because they WANT YOU TO GET INTO DEBT!! Don’t forget that. For that reason, avoid using the card for cash withdrawals, which are usually charged, and make sure you read the small print to find out any other charges or fees that may be applicable to your card.
Do a simple google search for “cash back credit cards” and the like and have a hunt around for a killer deal - if you love spending, and can make the full payments, you would be stupid to miss this. Remeber, gaining money here is so simple, you just go about your day to day business, and be paid for the pleasure.
