Before you realize it, you owe hundreds of dollars on your credit card that you can’t easily repay. In this regard, a credit card is akin to a trap that is set up before you to lure you into debt. If you want to learn how to avoid the debt trap of credit cards, you must fundamentally change your approach to using credit cards.
To start, assess your income and expenses for one month. If you don’t have a clear sense of what you spend in a month, track all of your expenditures over a month. Then, subtract your expenses from your income. If the number is less than zero, you are spending more than you earn and need to cut credit card spending or earn more to bring your cash flow into the positive.
If the number is already positive, as it should be, you are earning more than you spend. Implement a plan for how to spend the leftover money that month in a way that accounts for fixed expenses that stay the same each month, such as rent, variable expenses that change each month, such as utilities, and miscellaneous or one-off expenses, such as dining or entertainment. At the end of the month, evaluate whether you spent more or less than planned and update your budget for the new month accordingly.
If, however, you do not make enough to cover your bills each month by a wide margin, you may need to take the more drastic step of getting a second job or finding a new primary job that pays more.
Either way, until you secure the income needed to comfortably pay off the debt you incur from spending on credit, the only surefire way to avoid the credit card trap is simply not to use credit cards. If you don’t have plastic in your pocket, you can’t fall into the trap of overspending with credit cards.
To make this easier, avoid store credit cards completely and use just one or two major credit cards. This will help to limit any damage that you may do with store cards and may make it easier to take control of your spending situation.
While you may be tempted to close other credit cards as you pay them off, doing so reduce your available credit and lower the average age of your credit card accounts. Both of these changes can have the effect of lowering your credit card score. So if the card has no fee and has a low interest rate, it’s useful to instead keep it open and exercise discipline in spending to maintain your credit score.
You may also want to remove credit card information from the sites where you shop the most; having your credit card information stored is a trap because it bypasses the need to enter your card information, enabling you to go into debt in a single click. Any of these approaches can help you stop using a credit card for impulse purchases and ensure that you only spend on credit when the need arises.
Subtract your purchases from your budget categories so that you can monitor the amount that you are spending each month and can stick to your budget. If you find that you cannot pay off the balance completely for one month, stop using the card until it is completely paid off. This allows you to take advantage of the rewards without paying any interest to the bank.
Remember: The reason credit card companies offer rewards is that they motivate you to spend. However, the bank gets more money since nearly half of customers do not pay off the balance each month. If you really want to be rewarded, avoid paying interest each month.
Of course, 30% percent is just a general rule of thumb; the closer you are to a zero balance, the less likely you are to fall into the credit card trap. People with the highest credit scores tend to have utilization ratios that are closer to 10%.
Start by saving up between $1,000 to one month’s expenses; once you are out of debt, build an emergency fund that will cover three to six months of living expenses. It is a lot easier to make wise financial decisions and to work on paying off debt when you know you have the money set aside to cover sudden expenses.
