In today's financial landscape where credit cards and credit lines are plentiful, making even the tiniest purchases via credit has become a commonplace habit. Although using credit can undoubtedly provide convenience and be a lifeline in some instances, the reasons for utilizing credit can be both good and bad.
If you're someone who finds it difficult to postpone instant gratification, consider these nine strategies to help you resist the urge to rely on credit when you could (or should) instead pay in cash.
At the very least, an inability to exercise self-control over your finances can steal away your financial stability. At its most detrimental, an impulsive buying mentality can negatively affect other facets of your life, including self-respect, substance misuse, and personal relationships.
Although exercising restraint can seem tedious and difficult, it comes with numerous benefits and rewards. It opens the door to achieving financial milestones, such as purchasing a home.
Without a budget in place, it's effortless to lose track of minor expenses like coffee or books that can accumulate over a month and potentially lead you into financial straits. A budget is a powerful tool for many people to keep their spending in check.
Creating a budget is simpler than most people assume. Budgeting can be as straightforward as listing down your monthly income and keeping a running tally of expenses. The leftover amount will serve as your spending limit.
The importance of self-control when dealing with credit isn't for ethical or moral reasons; rather, it's practical. High credit card interest rates can make your purchases costlier if you don't fully clear your bill each month.
The danger of escalating interest rates is clear when, for instance, a $1,000 purchase made on a credit card with an 18% interest rate, and only minimum payments made each month, results in $175 of interest after a year. You'll still have a debt of $946 on your original purchase. If you didn't initially have the cash to pay for the item, adding interest to its pricing is probably not the best idea.
Compounding the burden, your credit card's seemingly low annual percentage rate (APR) might just be an introductory offer, poised to surge after a certain period. An example of this is an 8% APR that suddenly shoots up to a massive 29%, making any outstanding balances on the card dramatically costlier.
You may believe, "this won't happen to me. I'll clear my balance on payday." Even with the best intentions, unforeseen expenses such as car repairs can cause you to carry a balance.
Insurance companies that use credit scores to calculate premiums may view unpaid credit card balances negatively, possibly resulting in an unexpected increase in your insurance bill. Companies may assume that if you're unable to pay your bills, you might neglect car or house maintenance, labeling you as a higher risk.
Low credit scores can also present other challenges. Prospective employers often run credit checks, and a low score may result in you not getting hired. Credit scores play a crucial role when buying or refinancing a home as they determine mortgage rates and eligibility.
Arguably, money is the most common cause of disagreements among couples and families. Therefore, it’s crucial to collectively work on financial self-discipline and budgeting whenever possible.
Many people are persuaded into buying unessential or expensive items when using credit instead of cash. This is primarily psychological, as purchasing a $1,000 gadget may not seem like a big deal if you just sign a receipt, delaying payment.
Nevertheless, when you pay in cash, you physically experience the money leaving your wallet, making you more aware of the item's cost. This also applies to a lesser extent when paying by check and immediately recording the transaction in a checkbook, giving you an immediate insight into its impact on your account balance.
Uncontrolled shopping sprees without a plan for repayment or when unexpected expenses derail your plan, can lead you down the road to insurmountable debt. While bankruptcy may serve as a final resort in desperate situations, it could tarnish your credit history for as much as a decade.
If you don't owe money, you won't have to worry about late fees, interest, annual fees, or over-limit fees. The most efficient way to treat yourself is by saving first and buying when you can genuinely afford it, providing double the satisfaction by not needing to finance the item.
Your ability to repay plays a significant role in credit card usage. Your credit utilization ratio, i.e., the ratio of your outstanding debt to the total credit available to you, is a crucial factor. If you habitually utilize the maximum limit of your credit cards, it may be a warning sign.
A low credit utilization ratio is beneficial for your credit score. Ideally, your ratio should be less than 30%. For instance, if you have multiple credit cards with a total credit limit of $10,000, aim to keep your debt under $3,000. Keep in mind, a good credit score generally falls in the range of 670 or higher out of a scale of 300 to 850.
Credit can be beneficial when balances are regularly cleared each month. However, poor management of credit can be disastrous. Credit cards offer convenience, protection, and rewards, making them useful financial tools. But before you thrust yourself into credit card debt, consider the risks involved.