Have you ever heard people say, don’t get a credit card, you will pile a mountain of debt on your head? Well, the irony of this situation is those people who are telling you not to get a credit card, don’t own or have never ever used a credit card. They are simply passing what they hear according to their beliefs.
Of course, we are not here to change someone’s belief, and the one who is least interested in credit cards wouldn’t be reading this. So, if you are here and reading this post, congrats! However, you are different from the rest of the people who do not take time to learn about credit cards, same-day e-transfer Loan in Canada, and other credit instruments and use them as they see fit (which is the wrong way to use them) and often falling into a debt trap.
So, in this article, we will discuss everything about credit cards and things you should know about them before actually getting one.
What is a credit card?
A credit card is similar to a debit card. The difference is that a debit card uses the money you have in your bank account, whereas a credit card uses the money that your lending partner provides you.
This is the prime difference between credit and debit cards. However, if you ask which one is better, then let me tell you, every rich person on this earth uses a credit card and a debit card.
You would never hear a financially knowledgeable person say that a credit card is bad for your finances because this is far from the truth. However, another truth is that people fall into a debt trap by using a credit cards.
What is a debt trap?
A debt trap can be explained in various ways, but to keep it simple and short, a debt trap means you are pilling loans over loans on your head by paying a little amount to settle the bill for the time being. And this is also a major blunder people make by owning credit cards (we’ll talk about this later).
Let’s understand the debt trap through an example:
John makes $5000 a month, and his monthly expenses go $3000. He makes the payment using a credit card. At the end of the billing cycle, John pays a minimum amount of $500 to settle his bill for the time being. Little did he know the remaining amount would start incurring interest. An average credit card charges a 19% interest rate on the outstanding amount in a year.
The remaining $2500 will be carried forward and added to the next month’s bill. And if John spent $2000 on the next month, the total bill will be $4500. Even this time, the credit card company will offer him to make a minimum payment of $600 and pay the remaining bill later.
The credit will pile up on the initial amount by continuing the same cycle. Before he realizes John is already under a debt that is more than his monthly paycheck and is incurring interest of 19% pa. This is a debt trap where John has to pay most for the debt he owes and pay more in the interest. However, John may take the e-transfer Loan in Canada to pay his credit card bill, but he still has to adjust the loan monthly or weekly budget.
The right way to use a credit card
If you don’t want to fall into a debt trap, here is the right way to use a credit card.
- Get a free credit card
If you are applying for a credit card for the first time. Apply only for a free credit card. For starters, building a credit score and a good credit history is more important. Surely, paid cards offer much more benefits, but you don’t need those, so get a free credit card.
- Set a 30% limit
When you receive your credit card, you will have a higher credit usage limit than your monthly salary. But don’t be mesmerized. One of the major drawbacks of using a credit card to its fullest limit is that it negatively impacts your credit score. In addition, by using the full amount of the credit, the lender may generate doubt that you may or may not be able to pay the bill. So always keep your credit card spending within 30% of the total amount.
- Always pay in full
When you receive your bill at the end of the month, don’t only pay the minimum amount. Instead, pay the full amount. This will stop the pending amount from incurring charges and save your money that would otherwise go towards paying interest.
How not to use a credit card?
After learning how to use credit cards the right way, it is also important to learn about the wrong ways to use credit cards to avoid them.
- Do not overspend
When you have a credit card and see the amazing spending limit you have, you feel as if you can buy anything. But that’s a false dream. You have to realize that the credit limit is not the real money you have but the money you can owe. So, do not get overwhelmed with feelings and end up spending more than you have.
- Do not forget to track expenses
The institution that provides you with a credit card also provides a way to track all the transactions you made. Therefore, keep a weekly or daily check on the spending to keep it within your budget. Moreover, for good financial life, you need to track your expenses and keep them in check.
- Do not close your credit line
One major fault people make is they close their credit lines. You may have had a bad experience with that credit card, but closing the card is not a good idea. You can reduce its usage. Closing a credit line will remove all the history linked to that credit line, drastically impacting your credit history.
In the end, credit cards are a great way to build a credit score and improve your relationship with money. So, while learning about credit, you can also take a same-day e-transfer loan in Canada to understand how loans and credit cards are different and better understand their functions.