How to Get Out of Debt - How Credit Card Debt Affects You
Having credit cards will provide you with many benefits and conveniences. However, it takes a responsible person to be able to get the real benefits out of your credit cards.
There are many forms of credit cards. Basically if you have a card that allows you to pay for something "in advance", then you have a credit card. The major credit cards known today are VISA, MasterCard, and American Express.
The idea of credit cards become popular in a very short period of time due to human nature - greed. Because of the greed inside us, sometimes we want to "have" something before we have the money to pay for it in full. The financial or age requirements to apply and receive a credit card have become lower and lower. Teenagers nowadays can apply and get credit cards, even when they don't really have a reliable source of income.
Credit card companies take advantage of greed. As a result, credit card debt has become a huge problem in many people's lives. And it's all because people are not responsible enough to know their limits and therefore they fall into the traps set by the credit card companies such as your bank.
Basically the banks are betting on you not being able to make credit card payments in time, so they can charge you interest rates. The benefits they give you are not comparable with what you can give to them.
For example, your bank, say, PC MasterCard, offers you a 1% immediate rebate on all purchases using your MasterCard. So you go out and purchase:
- A laptop for $2,000.00 and receives $20.00 rebate
- A smart phone for $500.00 and receives a $5.00 rebate
So you saved $25.00. Great. However, if you miss a payment on your credit card, you will pay $37.50 in interest a month. ($2,500.00 at 18% annual interest rate is $450 a year or $37.50 a month)
If you have been able to pay off your credit card bills, that's good. Unfortunately, more than half of credit card owners don't. If they do, the banks would have been losing money and credit cards wouldn't have become so popular and widely used.
Benefits of Credit Cards and How to Take Advantage of Them
- Having a credit card allows you to pay in advance. Therefore, if you need to purchase something that is time-critical but haven't received your paycheck yet, you can take full advantage of using credit cards.
- Paying off credit card bills will improve your credit score in time. So if you are ever thinking about acquiring a mortgage in the future, you need a good credit score to be able to get approved for loans. Using and Paying off credit cards is a good way to build up your credit. However, vice versa, if you don't pay your credit card bills, you will hurt your credit.
The concept behind credit cards is fantastic for people with good money management, but bad for people without. If you have or are planning to have credit cards, make sure:
- You pay off credit card bills as your number 1 priority. These are "mini" loans at an interest rate of more than 18% on average.
- You only purchase items in advance that cost less than your budget with respect to your primary source of income.
If you don't have what it takes to own a credit card and use it to your own benefits, you might as well destroy it right now.
Getting Rid of Credit Card Debt
If you are already in a significant credit card debt, don't panic. Think about the following recommendations:
- Destroy your credit card(s) immediately so even if you are tempted to make a purchase you can't.
- Borrow money from family members to pay off your credit card debt right the way.
- Try to borrow money from financial institutions at an interest rate lower than your credit card's interest rate. (This process is often referred to as "Debt Consolidation")