These amazing tips will never let you fall into a credit card debt trap

Credits cards, no doubt, give you purchasing power. You go on a shopping spree on your credit card and pay later on. But, once you get into a debt trap, you get into a vicious circle and then it becomes very difficult for you to get out of it.

Most people know this fact in principle, but are unable to understand how things pan out. It is most common among youngsters who have just started with their jobs and get hands on credit cards.

The sound of swiping it and joy of using it online is amazing but one fine day you have to pay for what you spend.

And when you go beyond your means, you face an outstanding balance which becomes difficult to pay for months at the end!

So avoid landing in the soup and follow these four tips to avoid the debt trap.

Buy what you can afford

The one cardinal mistake people make is they use their credit cards to purchase what they cannot afford in cash, thus overspending or going beyond their means. Think of your credit card as a temporary substitute to cash that you will have to shell out in the next billing cycle. The moment you think you can “manage” things later and make purchases beyond your affordability, you have stepped into unchartered territory. Very soon you will realize you have spent a lot and end up in a sea of debt.

Pay your balances each month

If you want to avoid getting into credit card debt, make sure you are making full payment of your outstanding balance every month. This way, you will never carry forward your balance to the next billing cycle, thus avoiding the ‘minimum amount to be paid’ trap. The reason we call it a trap is because by paying your minimum amount due each month, you are only paying off your interest component and other charges that do not reduce your outstanding balance substantially.

Don’t give your credit card to others

We understand ‘friends in need are friends indeed’ but do not be magnetos and hand over your credit card to a friend, especially one who is reckless with his/her finances. If your friend does not have a credit card, perhaps his/her CIBIL report is not so great and the bank did not think of him as creditworthy. He/she may promise to pay you back the funds immediately, but if he does not, it’s your credit that is at stake and you may be stuck in a debt trap for no fault of yours. Besides, it can do substantial damage to your CIBIL score.

Do not ever consider a cash advance on your credit card

If you are thinking of taking a cash advance on your credit card, you have obviously not done the right thing! A cash advance may seem like a plausible and quick fix solution in emergency, but it is indeed the costliest credit. Cash advances on credit cards are charged as high as 35-50%. It is therefore a very high interest loan, much higher than any other loan product.

Also, do bear in mind that even if you pay fixed amounts as credit card repayments each month, your credit card issuer will first use your payments to offset your regular balance first and then apply the remainder of your payment for the repayment of your cash advance.
This means your cash advance will continue to accrue a high rate of interest. Furthermore, if you miss even a single repayment, you will end up paying a hefty amount to your credit card company as a late payment fee.

As you must have understood by now, your credit card is quite a lethal piece of plastic that can get you into a debt trap sooner than you can imagine!

It can also destroy your CIBIL score. Using your card responsibly, to build a good credit history that earns you a high CIBIL score.

(Rajiv Raj is the Director and Co-Founder of www.creditvidya.com)

(Image: Thinkstock)