Avoiding the Blackhole of Credit Card Debt

If used responsibly, credit cards offer many advantages. But credit cards have a darkside as well…

Credit card debt is an unforgiving black hole that becomes increasingly difficult to climb out of. If you fail to fully pay off your balance, then you will begin paying interest. And this is not a normal 5% interest rate either. This interest is mean and can be up to 30%! Think of it this way:

Normal interest would be like a guy gently knocking on your door and with a polite reminder that you that you owe him some money. Credit card interest is like the mafia kicking down your door in the middle of the night and breaking your knee caps.

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You don’t want this guy showing up at your door…

Okay maybe that’s a bit extreme, but you get the point: Credit cards charge insanely high interest rates when you cannot fully pay off your balance. Therefore, it is in your best interest to avoid credit card debt completely. These 8 tips will help you do just that:

1. Do Not Overspend

You need to know the relationship between your expenses and income. If your expenses exceed your income each month, then it’s obviously going to be difficult to pay off your credit card bill. I’m referring to your actual expenses here, not the amount you budgeted (and probably ignored). Learn what you spend your money on and exactly how much by tracking your expenses. If you do not have the cash on hand to afford something, then DON’T buy it. Purchasing items on credit and planning to pay it off sometime in the future is a terrible (and expensive) habit to get into.

2. Do Not Justify Spending for Rewards

It’s a great feeling when you book a flight using credit card points. It almost feels like the flight was free. You naturally want more of these points, so you start justifying certain unnecessary purchases:

“I could make dinner at home tonight, or I could get something delivered. But if I order take out then I will get 3x the reward points. One step closer to that Barcelona flight! Takeout it is!”

-credit card points guru

You are falling into the trap. Do not try to maximize your reward points. Pick a card that suits your lifestyle and spend as if the reward program didn’t exist. The points will take care of themselves if you select the right card.

3. Pay Off Your Balance on a Weekly Basis

If you are worried that you will be blindsided by a massive credit card bill at the end of the month, then pay off your balance weekly instead. Make this payment part of your Sunday routine. This will also ensure that you never encounter a “late” or “missed payment” fee ever again. And don’t stress, the credit card company certainly won’t mind that you are paying early…

Pro Tip: Setup automatic payments. At the end of each month, your credit card balance will be automatically paid off via the money in your checking account. This requires financial discipline, as you will need to make sure that your credit balance never exceeds the balance in your checking account (otherwise you will pay overdraft fees).

4. Always Pay Off the Full Balance

When you receive your monthly credit card bill you will see your balance and your minimum payment. You will avoid incurring any late fees/penalties as long as you pay more than the minimum. However,, you will NOT avoid paying interest on the remaining balance.

For example, let’s say your credit card bill for the month of September was $2500, and your minimum payment was $25. You decide to make the minimum payment so now your balance is $2475. The credit card company does not just forget about your remaining balance. Instead they charge you interest on it. So when next month rolls around, you now owe $2475, plus an extra $31 dollars of interest, plus whatever additional money you spent in October!

Failing to pay off your full balance each month results in a vicious cycle. You will constantly be playing catch up, and the extra interest you pay each month will make it harder and harder to eliminate your remaining balance. For more information about just how costly minimum payments can be check out this article from CNBC.

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Honestly I just got lazy and did not want to search for a creative picture showing someone paying something off in full…

5. Keep a Reasonable Credit Limit

The credit card company may allow you to spend $20,000 of their money, but this certainly doesn’t mean you should. Keeping a smaller credit limit will help you stay grounded. There will be less temptation to splurge on certain things, as you will not have a seemingly endless line of credit to work with.

6. Don’t Have a Wallet Full of Cards

With personal finance, simplicity is often superior. You only need two credit cards: a daily card and a backup card. This back up card is for emergencies only. This card is NOT for increasing the amount of money you can spend. If you find yourself maxing out the credit limit on your daily credit card, then you should ask for a credit limit increase or reduce your spending. As mentioned above, personal finance is best kept simple. Having multiple credit cards can really muddy your finances and make them harder to keep track of. You really don’t want to run into a situation where you forget about a balance on one of your cards. This will result in hefty interest payments and will be detrimental to your Credit History.

7. Have a Rainy Day Fund

You may find yourself financially vulnerable after you incur an unexpected one-off expense:

For example, imagine your car breaks down and requires a costly repair. You need your car to get to work, so you have no choice but to opt for the repair. However, you don’t have the cash on hand to pay for it. So you open a credit card. You likely will be unable to fully pay off the balance, so next month you will start making interest payments on it.

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Your Rainy Day fund might not cover this particular case of “car trouble”

Having some money set aside can help you avoid these types of situations. Ideally you should have $1000 set aside, ready to be deployed for these unexpected expenses. Now if something drastic happens (ex: large medical bill) then this $1000 probably won’t be enough. But it should cover most things such as car repairs, moving expenses, broken iPhone, etc. Make sure to replenish this fund if you use it!

8. Communicate with Your Credit Card Company!

Your credit card company may seem evil, but at the end of the day they understand life can throw you curve balls. Contact your creditor as soon as you know that financially difficult times are approaching. The more lead time the better. You may be able to work a deal with them to help navigate the difficult waters ahead:

For example, your parent becomes ill and you need to help pay for some of the medical expenses. Your credit card company may be willing to develop a payment plan with you. This way you will pay off the medical expenses over a number of years, without incurring the ridiculously high interest rates that accompany normal credit card debt.

So in summary:

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