Credit card, which is a part of system of payment named after a small plastic card giving to users of the system. The card holder can use the card to pay for the goods and services according to the promise of holder to buy those goods and services. The issuer of the card has a limit of credit for the consumer to make payment to merchant or as a cash advance to the cardholder to make payment. Cardholder have to pay for the money used in advance at each month, interest will be charged if the payment can't be made in time. The creation of this card has been facilitating a lot of people. However, it also causes lot of serious problem for users who use it improper and unplanned way. Recently, the credit card users are increasing. Even though there are financial crisis since 2007, but this does not affect the users who apply for using of credit card. With improper and unplanned use of credit card, it has been creating a lot of credit card debt for cardholders. Credit card debt is unpaid balance on credit line, there are several factors which causes the appearance of credit card debt:
i) Penalties and Interest
One of the main factors that causes debt accumulated is due to penalties and interest. Once the cardholder can't effort to make the payment for the month, the debt will be accumulated to next month and penalties and interest will be calculated due to late payment. Debt can be increased rapidly due to penalties and interest charged on late payment. Nowadays, most credit card companies allow cardholder to make several payment through online services.
ii) "Over-the-limit" Fees
Another main factor which causes the debt accumulated is "over-the-limit" fees. This excessive fees will be charged when the cardholder spend over the credit limit. This fees will be continuously charged unless the balance is paid below the credit limit. Cardholders have to know their limit.
iii) "Universal Default"
The credit card companies will raise the interest rate when one of the cardholder cannot make the payment for the month or late payment. This increased interest charged is applied to the cardholders who fail make the payment and also those cardholders who make their payment in time. This methodology is known as Universal Default. So, do not be the bad apple and let others paid for your mistakes.
iv) APR, or annual percentage rate
Annual percentage rate is also one of the factor that contribute to the credit card debt. This annual percentage rate is charged by the credit card companies and pay by the cardholders. It does not fixed, can be changed by the decision of the credit card companies. The increased rate will increase the credit card debt.
Credit card debt is just like gaining weight, easy to get but hard to lose. However, losing weight is not impossible, neither getting out from debt. Keeping yourself away from debt, by taking few steps of prevention, your finance will have a clean bill of health.
Here are some ways to prevent from making credit card debt:
i) Manage your finances
Everything starting with planning, well management of finance will help you keep on track before you being pull out the credit card. For the first and important step, you must figure out your monthly income and needed expenses. 10% of the monthly income should be save and prepared for emergency used or as a saving. You will be never have a large amount of credit card debts once you have saving the money each month. Besides that, you should be never spend more than 30%-50% of your available limit. Otherwise you will not be able to handle the payment after deduction of needed expenses.
ii) Shop for the right card
It is important for you to shop around and get the right card personalized for your particular situation. It is always important for which card you choose based on the lower interest rate or lower fees. It maybe need to spend some time to compare each credit card, but it will help you prevent from making heavily credit card debt.
iii) Read the fine print
Do not ignore this step! Many people will think that it's not important to read through the fine print, but it's worth! Spend few hours to look through and understand it can save you hours of headaches and hundred even thousand of dollar in long run. You will know everything from the interest rate and fees to learn how to get rewards and how long of the grace period you have.
iv) Pay the balance in full
It's always important that to control the use of credit card. You should ask yourself whether you are able to pay for the price before you want to use credit card. In case of emergency situation, if your emergency fund are not enough to cover all the debt, at least you have to pay more than the required minimum payment.
v) Pay on time
Never make any late payment including car and house payments. Due to the universal default, credit card company can raise the interest rate if you make late payment. Besides that, you are encourage to make payment before the mail time. If you are able to make payment before the actual due date then it can help you to save money from interest due to the interest charged is based on average daily balance. So, if you make payment earlier then you can save money from paying less interest.
vi) Use it like cash, not a credit card
In one sense, you have to bear in mind that you need to use credit card like cash because you have to pay the amount at the end of each month. However, it is really not cash! It maybe convenient for you to keep it in wallet and it look sleek. Maybe you will feel rich and each time you hold and spending with it and you will feel the same. With cash you can feel it when the cash in hand are increasing or decreasing. You cannot physically feel that your debts are increasing when you are using credit card. So, you need to control in spending with credit card and spending habits. It's easier to make more debt if you're using credit card for all your purchases.
References:
i) http://en.wikipedia.org/wiki/Credit_card
ii) http://www.debtsolution-strategies.com/creditcarddebt.htm
iii) http://www.cardratings.com/howtoavoidcreditcarddebt.html
No comments:
Post a Comment