Credit cards, if not used responsibly, can easily and quickly lead to a debt spiral. Not paying your credit card outstanding can become financially draining, as you keep accumulating interest on your balance as well as new purchases, making your credit card debt larger with each day. While unforeseen emergencies can sometimes lead to unmanageable debt, in many cases overspending and irresponsible usage lead to an unsurmountable credit card debt. Hence, it is important to manage your credit cards wisely. Here are some of the ways how you can avoid credit card debt.
Buy Only What You Can Afford
Credit cards, with their usual 40-to-50-day interest-free period, offer you the convenience of buying now and paying later. However, what comes with this benefit is the temptation to overspend. While you might think you can easily pay over time, spending too much can be risky, especially if you are unsure of your future cashflow. You should be responsible with your expenses by making conscious choices about your purchases to avoid falling into debt. Prioritize your needs over your wants, and swipe your credit card for purchases you can afford to repay. Avoid using your credit card for impulse purchases or luxuries beyond your means.
Pay Your Bills on Time and in Full
Missed or late payments are one of the primary reasons why people fall into credit card debt. When you miss payments, credit card issuers levy high interest rates and late fees, which can quickly accumulate. Furthermore, paying only the minimum amount due every month is also not advisable. Doing so means carrying the remaining debt from month to month and accumulating interest charges on the remaining balance, as well as on any new purchases. Paying the entire balance each month on time is the best way to avoid credit card debt.
Avoid Credit Card Cash Withdrawal
Credit cards also give you the facility to withdraw cash from an ATM, up to a limited amount. However, cash withdrawals from credit cards can quickly lead to debt for two reasons. One, cash withdrawals do not qualify for the interest-free period, which means interest will be applicable from the day of withdrawal. And, two, when you withdraw cash, new transactions become ineligible for the interest-free period, which means you will incur interest charges with each purchase you make. Cash withdrawals can quickly lead to debt accumulation and, hence, must be avoided.
Make Smart Use of the Interest-free Period
Credit cards can offer you an interest-free period of up to 50 days. When you have multiple cards with varied billing cycles, you can plan your expenses to make optimum use of the interest-free period. The purchases you make at the beginning of your billing cycle would get more interest-free days as opposed to those made later. Hence, when you have to make a big-ticket purchase, you can use a card that offers more interest-free days. This will help you manage your monthly cashflow with ease and avoid debt.
Make Use of EMI Facility for Big-Ticket Purchases
Many credit cards offer Equated Monthly Installment (EMI) options for big ticket purchases. When facing difficulty making an expensive purchase, you can choose the EMI option and repay the amount in manageable installments. Additionally, if you have already made a big-ticket purchase and are struggling to pay your credit card bill, you can convert your outstanding balance into EMIs by contacting your card issuer. Opting for EMIs for big-ticket purchases allows you to pay a larger chunk of debt in smaller and more affordable amounts. However, before opting for the EMI option, you should check about the interest rate levied on it, processing fee and other related charges.
Limit the Number of Cards You Use
Owning multiple credit cards might seem more beneficial but this holds true only if you can manage each card responsibly. Managing multiple accounts or payments could lead to missed payments and debt accumulation. Also, with each additional card, the temptation to overspend increases, eventually leading to the accumulation of charges and, ultimately, credit card debt. Also, there are higher chances of losing track of your spends and payments if you use multiple credit cards. Therefore, limit the number of cards you have in your wallet to what you can comfortably manage.
Review your Monthly Credit Card Statement
You should regularly check your credit card statements; it will help you understand your spending pattern and the categories on which you spend the most. Sometimes, wrong debits can also increase your credit card dues, which should be rectified at the earliest. Regularly reviewing your statements will help you manage your cards smartly and avoid falling in debt.
Overall, responsible credit management is important to avoid credit card debt. By implementing practices like creating a realistic budget, monitoring financial health, paying bills on time and smartly using credit cards, you can effectively manage your finances without the burden of debt. However, for individuals already struggling with credit card debt, a balance transfer at a lower interest rate or a personal loan can be a reasonable approach to clear the debt burden.
Note: An edited version of this article was published in The Hindu on 11th March 2024.