Do you believe you have accumulated credit card debt from poor money habits?
Or is the bank’s fault that makes spending on credit so easy for us?
I used to have a heated debate on the subject with a friend.
He was forever empathetic towards people who have credit card debt. And he solely laid the blame on financial institutions:
They make it too easy for people to spend: they prey on people’s weaknesses.
And I was adamant in that the companies don’t force individuals to take up debt they can’t afford to pay.
Each of us didn’t budge, so we’ve never reached the concrete conclusion.
Having ended up with credit cards woes myself since, I now know the truth lies somewhere in between and nothing in life is black and white.
I also know that, based on my own experiences of spending cash only with no card, card payment changes the way we spend money.
Throughout the day, how many times do we “tap and go” with our cards?
Yet, we don’t see the actual money leaving out of our pocket.
When was the last time you withdrew money from ATM?
From the moment we work, financial institutions can’t wait to offer us a credit card loaded with “free money”.
Which is so accessible and easy that it’s hard to resist.
If you’re like me, you might have been super good with credit cards at the beginning.
But over time, we get addicted to its convenience to the point we adapt the “spend now pay later” money mentality, delaying our responsibility and putting an unavoidable burden on our future self.
We become a slave to debt as opposed to building our wealth.
After having made my fair share of mistakes with credit cards, I’ve learned several common money mistakes we make when using credit cards.
1. Normalising Debt
No matter what anyone tells you, it’s not okay to have debt.
The moment you justify yourself because your sister said, “everyone has debt”, you’re voluntarily walking into a debt trap.
Don’t entertain “it’s only $10” or “it’s only a one-off” if they aren’t in your budget.
No one wakes up in the morning, thinking “let’s make our bank a little richer.”
But that’s precisely what we do by whipping our credit card and buying the stuff we don’t really need with the money we don’t have.
Aim to be your own bank.
Which means you have enough money to do whatever you want to with your own money and use the bank for their services only e.g. keep your money safe, pay the bills or save and invest.
2. Paying Late Fees
Set up an automatic payment. This way, you never miss a payment and avoid late fees.
If the unfortunate event happens because you forgot to set up an automatic payment and life got hectic, ring up the bank straight away.
Most banks will cancel the fees when you talk to them.
Whether it’s $5 or $20, it’s your hard earned money.
Don’t let it slip through your finger when a phone call can put a stop to it.
Not caring about the small amount of money builds money complacency and therefore bad money habits.
3. Paying Only Minimum Payments
Credit card interests are extortionate.
It’s the most expensive form of borrowing besides payday loans.
Your interest alone will skyrocket almost equivalent to the original debt if you don’t keep up with payment (more on this below).
If you can’t pay in full every month, it’s a sign that you’re living beyond your means.
4. Not Consolidating Your Debts
If you have several credit cards, shop around and consolidate your debts.
I’ve done this before and successfully paid off debts with low interest, saving thousands of dollars.
The good thing about many companies competing for your custom is you can find better options.
Loans are far cheaper. It’s also easy to manage your account when you have everything under one account.
Or look for a balance transfer offer.
You’ll want to make sure you clear debts before the initial promotional period expires when an interest rate goes back up.
Consolidating your debts is an excellent way of clearing them when you’re really committed to debt-free, once and for all.
♣ WARNING: consolidating debts should be used for clearing the existing debts only, not to rack up more debt!
5. Using Credit Cards for Essential Expenses
When you pay for food, utility or phones bills using your credit card, recognise that you’re in money trouble.
I know desperate time calls for desperate measure. But buying essential stuff with credit cards is really a bad idea.
The interest charges alone will be so high that you’ll be digging into debt further. And it’ll get much harder and longer to pay it off.
The moment it happens, contact your bank and explain your situation.
Depending on your credit history with them, they’ll give you a grace period, freezing or reducing interest fees while you work on improving your situation.
Don’t let embarrassment stop you.
Things happen. It’s okay to ask for help while you actively look for solutions.
6. Using Credit Cards for Rewards/Points
Even if you aren’t in debt, the rewards system can massively lure you in and encourage you to spend more leading to bad money habits.
Earning rewards or points should be by-products of buying the essential stuff.
Food is a good example.
Going to a fancy restaurant because you can collect royalty points?
Not so much.
7. Too Hung Up on Credit Score
Is maintaining a good credit score “be-all-end-all”?
It almost sounds like it when you go by what people advocate, as if it’s impossible to navigate this world without it, which isn’t true.
If you’re in debt like me, we’re better off prioritising debt-free life and building wealth instead of getting too hung up on credit score.
When we work on the former, the latter improves anyway.
8. Treating Credit as Your Own Money
Ah, the illusion of credit card!
When you can buy stuff with credit cards loaded with plenty of money with immediate access anywhere and anytime, it can be so easy to assume it’s your money.
But it’s the biggest illusion of all: credit is not money you own.
Use credit cards to buy stuff only when you have money to cover your purchase in your bank account.
If you don’t, don’t buy it.
9. Not Understanding the Magnitude of Compound Interest
Making a minimum payment for your credit card might make you feel you’re in control of your finances.
Putting this into perspective though, let’s say you have $10,000 credit card debt at APR 17%.
It will take you 16+ years to clear the principal and interest when you make a minimum payment.
Interest charges alone amount to $8,504.16.
Use this calculator, see how long it will take you to clear your debt and how much you’ll end up paying in total.
Compare that to “what if you saved and invested instead”?
Let’s say, we save $50 a month for 16 years.
A modest return of 5% interest will yield you $14,576.06.
That’s how debt vs saving & investing affect your financial state.
Would you like to choose the debt of $18,504.16 ($10,000 principal debt + $8,504.16 interest) or a return of $14,576.06 on a modest saving of $50 a month?
It’s paramount to understand compound interest.
Debt can put us so far back in building wealth, since compound interest works negatively and positively.
No wonder why Albert Einstein says:
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
– Albert Einstein
Hope this post helps you think about the way you manage your finances, especially your credit card debt.
And start planning to build a financially independent future (and avoid being a slave to debt).
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