Smart credit usage: Seven tricks to avoid debt traps
Buying things on credit can be part of good financial planning… or it can lead to disaster. Many of us have learnt this lesson the hard way. It’s also almost impossible to live totally debt free and used wisely, credit is a great way to make life easier. In an age where credit accessibility has become dangerously convenient it can lead to dangerous overspending.
There is a huge and important difference between debt which can be considered ‘healthy’ and debts which are just plain detrimental to your financial situation. The key is to identify these early on. Pieter van Heerden best known for his debt focused publications on the Wonga website has kindly shared the following piece which provides valuable insights into the various kinds of debts you will encounter.
Remain continually vigilant of the fine balance between flexible credit and ensnaring yourself in debt. Remember that each new account opened potentially deepens your debt, resulting in higher monthly credit repayments and reduced disposable income for daily expenses.
If you find yourself struggling with escalating debt, make a firm promise with yourself regain control from this day forward, limiting your debt to amounts you can comfortably manage.
You can start by reading these seven tips for effective credit management:
One. Understand your debt:
Familiarise yourself with the true cost of credit. Calculate precisely what you’re repaying monthly in terms of fees and interest. Prioritise settling debts with the highest interest rates first.
Two. Consolidate your debt:
An effective strategy for managing monthly debt repayments is consolidation. Consult with your bank regarding their interest rates and fees; you may find it more economical to borrow from them to settle all your debts at once and then focus on repaying the bank. There are third parties that can assist you with this restructuring process also.
Three. Live within your means:
This is a challenging reality to accept for many of us. Before committing to a purchase, consider whether the immediate ‘feel good factor’ justifies the inevitable financial anxiety. More often than not, the answer is no!
Four. Plan before purchasing:
When possible, use cash for necessities such as food or clothing rather than relying on credit. Charging everything to a credit account may tempt you to overspend beyond your needs or budget.
Five. Evaluate your options:
Before signing on for any additional credit, ask yourself: “Is there a better alternative?” e.g. spreading costs over an extended period lulls you with an ‘affordable’ monthly out-going.
However, you ultimately pay significantly more for the item in the long run. There is strong evidence that personal loan providers are encouraging customers to adopt longer term debt than they really need.
Six. Treat debt seriously:
You need to recognise and respect the severe implications of defaulting on credit repayments. Each missed payment increases interest and contributes to a poor credit history, complicating future credit applications to say the least. I don’t want to fear monger but in some cases the damage can last a lifetime.
Seven. Maintain your optimism:
I’ve saved the most important to the last! With self-discipline, honesty, and careful budgeting, escaping and avoiding the debt trap is entirely achievable. Confronting a debt problem and taking the first steps to addressing it is often the most difficult step. Stay strong and focused on your long term goal. You’ve got this.
