How to Avoid Credit Card Debt Traps

When it comes to credit card usage, there are three types of users:

The first type is people who manage their credit cards wisely by using it to pay for things that they actually have money readily available in their bank accounts or through a source of recurring revenue.

The second type is people that use it to buy things that they actually don’t have money to pay for but intend to pay it off in subsequent months. This set of people are the ones that often get into a debt trap.

The third set of people use it only for emergencies and do not use their credit card for daily purchases. These people may not get into a debt trap but they also are not getting the most out of their credit cards.

So, what is the best way to use a credit card? We list some techniques that will help you use your credit cards wisely without getting into a debt trap.

Pick a Credit Card with a Purpose

Credit cards come in various types that can help you collect rewards points, airline miles, cash back, etc. The key here is to identify your need and apply for a credit card that fits your lifestyle needs the best. For instance, travel rewards credit cards can help you accumulate enough airlines miles to help pay for flights on your next family vacation. Of course, you will need to collect a lot of miles to help pay for these tickets.

It helps to shop smartly when using credit card rewards. Some credit cards offer 3x or 5x points for purchases made of a certain type (eg: booking tickets using a specific travel partner)

Identify Purchases that you can Charge to a Credit Card

Not every purchase needs to be made using a credit card. While going cashless is the trend now, remember that every small purchase adds up and can come as a shock when the monthly statement arrives.

Depending on the type of credit card you use and the rewards that you accumulate, you can decide to use a credit card for its other benefits. For instance, if you use a cash back credit card, you can use it for making daily purchases like groceries, food, etc. In most cases, you will find a credit card that rewards you for a specific type of spend. If you have a travel credit card and small grocery purchases don’t give you many points, consider paying for such purchases using a debit card or in cash.

Pay Credit Card Bills on Time

Whether you pay the minimum or the entire balance, make sure you pay your bills at least 4-5 days in advance allowing sufficient time for the money to be credited to your account. Paying credit cards dues after the deadline can lead to late fees and not to mention extremely high-interest rates plus GST.

You can avoid these traps by making sure you pay on time. Most banks these days send SMS alerts at least a week ahead of your payment deadline. Set reminders on your phone if you feel you may forget the due date or consider setting standing instructions with your bank to pay off your credit card dues if have the money.

Don’t Rotate Balances if you have the Money

Pay off your credit card dues on time if you have the money available. Remember, credit card interest rates are some of the highest in the industry with some of them charging 3% or more every month. Unless you absolutely cannot pay off your dues in full, try to pay as much as possible and not just the minimum to avoid high interest rates.

If you fail to pay your entire balance on time, you will be charged interest for every day that you rotate the balance due. There are no interest-free days if you carry over dues.

Monitor your Credit Card Statements & SMS Messages

This seems like an obvious thing to do but many credit card users seldom check their statements. A simple check will reveal if you have been overcharged or have duplicate charges on your credit card. Yes, it’s possible that these mistakes occur or could also be done fraudulently, checking your credit card statement can help you take corrective steps immediately.

Avoid using your credit card at places where you lose sight of your credit card, always request that your credit card be charged in your presence to avoid any malpractice. Pay attention to your credit card transaction SMS, consider this is an early warning system. If you notice an unfamiliar charge you should call your bank immediately and verify it or reverse the charge.

Pay Off High Dues with Balance Transfer or a Personal Loan

If you have accumulated a lot of dues and are facing problems meeting your credit card expenses, consider a balance transfer option or applying for a personal loan. A balance transfer credit card can give you an interest-free period of 3-6 months depending on the type of credit card.

Consider moving the dues to another credit card if you think you will be able to pay those dues off within the interest-free period. If balance transfer is not an option, then consider a personal loan that will come at a more affordable 14-16% interest rate whereas a credit card will set you back a huge 36-42% per year in interest fees.

Use your Credit Card Wisely to Reap Benefits

It’s not all bad if you use your credit card wisely and are able to pay off dues on time. You can reap the many benefits that these credit cards have to offer. You can get an interest free period of up to 40 days in some cases.

You can also collect reward points that can help pay for fuel expenses or even airline tickets. The key here is to consider your credit card as an extension of your bank account that you can pay off every month in full and not just to rotate credit.