Eight ways to avoid credit card debt trapCredit cards represent financial convenience in modern times. Dubbed “plastic money” by the financial services industry, these cards have carved a place for themselves in the wallets of modern consumers. Credit card holders can use such instruments to pay for restaurant dinners, to finance gadget purchases, shopping expeditions, vacation trips, grocery bills, and so on. However, every consumer should beware of entering a credit card debt trap. We shall outline some of the techniques below.

1) Pay up every month

Credit card users must make it a point to pay their debts to the card issuing institution each month. This ensures that the user does not build up unsustainable levels of debt in their credit card accounts. This action also saves credit card holders from the dangers of high annual interest rates typically imposed by the credit card issuing institutions. In a nutshell, credit card users must only spend the amounts they can afford to pay back each calendar month.

2) Recognizing the signs of credit card debt

It is an important aspect of avoiding a financially unstable situation. Most users of credit cards fail to pay attention to their credit card usage patterns. This dangerous trend often leads the way to credit card debt. Therefore, users must analyse spending patterns and step up vigilance when they strain their monthly budgets to pay off the credit card issuer. The best way to counter a potential debt trap is to moderate the use of credit cards and use cash judiciously in everyday situations.

3) Avoid credit card cash withdrawal

Consumers and users of credit cards must avoid pulling cash advances on their credit cards. This technique often means easy cash in the hands of the credit card holder, but the danger stems from the high-interest rates imposed on such cash withdrawals. Most consumers can deal with the occasional instance of pulling a cash advance. However, this should become a default habit. The average citizen can deal with the situation by creating emergency funds that remain completely separate from credit card payment cycles.

4) If you can’t manage it, give it up

Consumers can altogether dispense with using credit cards to avoid debts imposed by the use of “plastic money”. This technique allows citizens to live within their means and exercise frugality in their spending patterns. A consumer can deal with deficits in cash by following strict budgets or availing a personal loan from a bank. The absence of credit cards cuts tendencies to overspend and imposes automatic discipline on consumers’ spending patterns. This technique also teaches consumers the value of every rupee and its importance in our chosen lifestyle.

5) Limit the number of cards

The frequent use of multiple credit cards represents the surest way to enter the debt trap. Multiple credit cards can be harmful to personal spending habits because they create the illusion of unlimited funds available on tap. Therefore, smart and vigilant consumers can choose to limit the number of credit cards they operate in their daily lives. This option automatically restricts spending habits and protects consumers from ‘low interest’ marketing schemes deployed by the credit card issuing organizations.

6) Have a credit-wise approach

A ‘credit wise’ approach to using credit cards enables consumers to judiciously use credit cards. This technique is directly tied to the lifestyle choices of a consumer. A balanced lifestyle enables card users to smartly deploy the abilities inherent in credit cards. There are cards that can give you reward points for every purchase which can be accumulated to buy air tickets and other goods. Consumers can also elect to monitor spending actions and patterns as part of the ‘credit wise’ technique. Knowledge of interest rates also enables consumers to systematically pay card debts in response to credit card statements issued by banks. In addition, remaining aware of credit card usage patterns enables individuals to preserve a high credit score with modern credit bureaus.

7) Once in trap, take a personal loan to clear card debt

Certain financial service operators advise consumers to avail loans to pay off outstanding amounts of credit card debts. This technique makes sense because personal loans, gold loans, and loans against securities typically attract lower interest rates than credit cards. However, this technique must be applied only when credit card debts have reached unsustainable levels. That said, we note the aim of every credit card user should be to avoid the debt trap situations that follow the indiscriminate use of credit cards.

8) Convert to an EMI

Credit card users can opt to convert outstanding debts on their “plastic money” into equated monthly instalments (EMIs). This technique allows debtors to spread outstanding payments over three to twelve months at a higher interest rate. This financial device can help card users to avoid personal insolvency. However, this technique also lowers the spending power of the credit card holder. Any situation wherein the debtor fails to pay off the EMI attracts additional interest charges imposed by the card issuer.

These techniques can help the ordinary citizen to use credit cards wisely and efficiently.

Dhwani Pal

Dhwani Pal is a contributor to RupeeIQ.