Avoiding the Credit Card Trap

Credit cards are financial tools much in the way a hammer is a tool on your workbench. You can use a hammer to build something, but if you're not careful with one, you can also use it to injure yourself quite severely. Accidentally with a hammer won't kill you, but you're definitely going to feel it! Credit cards are similarly a double edged sword. You can use them to get extra consumer protections and cash back, but if you're not careful, you could find yourself in tens of thousands of dollars in debt and then have compound interest preventing you from digging back out of the hole. Fortunately through a bit of due diligence, you can avoid getting in tens of thousands of dollars of credit card debt.

We all know that the best way to get out of debt is to never get into it in the first place. People primarily get into large amounts of credit card debt in two ways. The first way that people get into huge amounts of credit card debt is that they have a cash flow problem. People lose their jobs or have some sort of emergency which creates an unexpected bill. They don't have enough money coming into take care of everything, so they pay for whatever they need to with a credit card until things are better again. The problem is that it's often months or years later when everything is finally better and they have money coming in again. By this time they've racked up well into five figures of credit card debt. Chances are their interest rate is anywhere from 15% to 25% which is only compounding the problem.

We're all going to have an emergency at sometime in our life that's going to cause a bit of a cash flow problem, and that's to be expected. We just need to prepare for such an event so that it doesn't cause a financial crisis. The best way to do this is save up three to six months of expenses in a separate savings account that you call your emergency fund. Whenever you lose your job, have an unexpected medical bill, or another major bill comes up that you weren't expecting, you can take money out of it. That way you don't have to go out and borrow money when something bad happens. After everything is well again, you can build up your emergency fund, and go on with life. This way there's plenty of money around to take care of unexpected bills, and you won't have to reach for your credit card if a problem arises.

The second major way that people get into credit card debt is that they just don't realize how much money they're borrowing. They use their credit card to pay for everyday expenses, such as going out to eat, clothes, groceries, gasoline and the like. They pay the minimum balance every month, thinking that they're okay as long as they pay on time. They enjoy that they can charge as they please and send in a low monthly payment, but don't take the time to realize that they're racking up huge sums of debt. They keep borrowing and borrowing, and before they know it, they have $10,000 in credit card debt.

The best way to avoid this trap is to commit yourself to pay the balance in full every month. Only charge what you can afford to, and never anything more. This way you'll have all the benefits of the rewards programs and consumer protections, but you won't have any of the finance charges and you won't be building up a big pile of debt. Just get in your mind that you will have to pay off whatever you're charging this month, and it'll go along way in helping you charge much less money. If you're still having a problem charging too much to your credit card, consider cutting it up. Live on a cash basis if you just can't handle using a credit card in a responsible manner.


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