How To Use Plastic RESPONSIBLY
For new school-leavers in particular, it’s vital to understand the rudiments of finance. You’re officially entering the adult world and all the responsibilities that come with it. And if you’re going to be living on your own, you may be worried that you are now expected to make grown-up decisions you aren’t even sure you’re equipped to make without the familiar cushion of your parents or guardians. One such area is that of your personal finances. Truth be told, I still bounce major decisions, financial or otherwise, off of my mother, but the responsibility is ultimately mine as an adult.
Now that you’ve found a job and are an actual income earner (congratulations!) you’ll likely be offered credit cards from various financial institutions. A credit card, after all, would seem like validation that you’re now seen as the adult you’ve fought all your life to become. Besides which, you know that using a credit card on an ongoing basis helps build your credit rating, which will benefit you in the future when it’s time for big-ticket purchases like a home.
However, there are serious drawbacks to having a credit card if you don’t understand how to use it properly. Here are three tips for the newly employed for using plastic without ending up in debt.
What, exactly, is a credit card?
If you’re a school leaver, you’ll say that a credit card isa small plastic card issued by banks and other financial institutions that allows the holder to buy goods and services on credit. And you’d be right. Only there’s another part to the definition that so many people seem to forget. Yes, it’s true that a credit card is a facility that offers a line of credit that enables you to make purchases, as well as balance transfers and/or cash advances, but importantly, a credit card also requires a repayment of the loan amount sometime in the future. It is not free money. Using a credit card essentially is a loan taken from the bank every single time you flash it. And, because of the nature of a credit card, people don’t remember that every individual purchase made with it represents a loan being taken out because they’ve been conditioned to think that a loan from a financial institution is a lump sum made available all at once.
The fact is, though, the contract you enter in with the institution from which you received the card is that you’ll make at least the minimum payment on your balance each month by the due date.
Be mindful of credit card debt
It seems a straightforward proposition, this contract with the bank, doesn’t it? Use the card, make a payment at the end of the month. But it’s very easy to fall into the trap of credit card overspending because of the ease of use, which can leave you in serious debt quickly because interest is charged on your balance. Remember, it’s a loan. Interest is charged on loans. In the same way that payments must be made on car and home loans each month, payments must be made on credit card loans. The big drawback of credit cards that so many people run into trouble with is the false sense of security these cards can give them, making them spend more than they can actually afford to spend.
To avoid getting into credit card debt that can unfortunately drag on for years, here are two tips:
• Keep only one credit card or two if they have different currencies and make sure you’re comfortable with the limit. If you know you have a propensity for frivolous spending, and fiscal management is a problem, having a high credit limit can be like gas on a flame that makes you incapable of hearing the little voice in your head saying: “Stop spending!” Save for purchases. In other words, before you start waving plastic about, ask yourself if you in fact have the available cash to buy the item on the spot. A credit card is meant to be a convenience, used to front cash you do have, not cash you hope to have someday in the distant future because, as you will come to find out, life happens and the best-laid plans can go up in smoke, affecting your ability to service your debt. Many cards have additional benefits like airline miles, so if you use your card to build points pay the entire thing off as you have the cash. Personally, I don’t even wait until the due date, as I do not want to give myself the false impression that I have extra cash. • Try to pay off the full balance each month. This is where fiscal discipline is tried and tested. So many people are unable to pay off their balance each month and unwittingly end up paying serious compounding interest simply because they only ever make the minimum payment each month. Yes, unforeseen circumstances can and will crop up, making you perhaps unable to pay your balance in full. If this happens, pay more than the minimum amount. Then put the card away until you’ve paid it off in full.
Once you start using credit cards, it’s hard to imagine your life without the convenience and flexibility they provide. Avoid the pitfalls of credit card debt, however, by not spending more than you can afford to.