Credit cards can be an amazing resource, but what happens when you’re not able to pay your bills on time? Credit card debt is one of the biggest and scariest types of financial trouble you can find yourself in, but there are a few surefire ways to avoid falling into it. Here are some of the biggest causes of credit card debt, and more importantly, how to stop them from happening to you.
Living Paycheck to Paycheck
A scary amount of us live paycheck to paycheck, and while it works so long as everything in your routine stays the same, the second something unexpected happens, disaster can strike. Whether it’s a sudden illness or your car breaking down and needing thousands of dollars worth of repairs, emergencies or unexpected expenses are often the death knell of your credit score.
No one ever want to be in the position where they’re forced to rely on their credit card, but for those who live paycheck to paycheck, it can absolutely ruin financial stability. The key to avoiding credit card debt in this case is prevention. Cut down on any extra expenses each month, and put the money you save into an emergency fund. Do your best to save up at least 3 months income. It might take you a while, but you’ll be incredibly grateful to have it the next time your car engine dies or your loved one needs expensive medical treatment.
The inability to budget well affects everyone – even those who make a comfortable living and don’t spend more than they make. Keep track of how often you use your card and scrutinize your spending. Little purchases here and there can add up – and quickly – taking your bill from something you can pay off in a month to one that requires two months (meaning added interest). Bad budgeting is the root cause of most debt, but when it comes to credit cards (which tend to have the highest interest rates), it can be especially damaging.
Misunderstanding how Interest Accumulates
It is always best to pay off the number that appears on each month’s statement in full. You avoid interest charges completely (meaning you only have to pay what you actually owe) and you build your credit rating (so your chances of getting approved for low-interest rate loans grows considerably).
Just because you have the option of only paying the minimum payment each month doesn’t mean you should. Only people who are struggling financially and have absolutely no other choice should be paying solely the minimum payment. Doing so drastically elongates the length of time it takes to pay off debt and racks up so much interest that you end up paying back way more than you initially owed.
Loss of or Reduced Income
This ties directly into both the first and second points. A complete loss of income is devastating for anyone, but absolutely catastrophic for someone with no emergency money saved up. They are forced to live on borrowed money until they can get back on their feet. This is why everyone – regardless of income – should have an emergency fund. Let’s say you still have an income but it’s been reduced, you can very quickly begin to rely on credit cards unless you sit down, map out your finances,and budget. Losing your job or a portion of your income is rarely under your control, but how you deal with the fallout is entirely up to you.
The culture we live in today actively encourages splurging on big purchases. Companies dress up the sale in attractive language, offering you lowered rates or free interest periods in an effort to get you to bite. They key is not to listen. Don’t make impulsive purchases or spend irresponsibly. Know exactly how much you can afford each month, and stick to that. In the same vein, try to avoid spending future money. Stick to what you already have, because while future money is assumed, it’s never guaranteed.
If your eye is on a big purchase, force yourself to think about it. Yes, a new flatscreen TV is always nice, but do you really need to purchase it on the spot just because the sales associate is pressuring you to? Go home, do some research, and look at your finances. If you have enough disposable income and haven’t been able to find the same item for a lower price elsewhere, then go for it and revel in the peace of mind that comes with shopping responsibly (and within your means).