If you're reading this, there's a good chance you have credit card debt or have had it in the past. Even if you think you've got it all under control, there are still some dangerous things about using credit cards that might be affecting you, so it's important you know them and understand how to protect yourself.
This post originally appeared on ReadyForZero.
Image via Jacek_Kadaj (Shutterstock)
Let's take a look at the four most dangerous things about credit cards (and how to fight back).
They Make It Effortless To Spend Money
Credit cards are often mistakenly thought of -- and used -- as extensions of our income, but just because we have a certain credit limit doesn't mean we're free to purchase whatever we want. I found this out the hard way, as I racked up credit card debt like it was my best friend.
It's unfortunate that credit cards make it all too easy for us to spend money, but it's the truth. We tend to purchase things without thinking of how we're going to pay for it when the bill arrives -- and it inevitably will.
How to protect yourself: Challenge yourself to only using debit cards to make purchases for the next 14 days. When you go to the supermarket or out to eat, leave your credit cards at home and use your debit card, or cash instead. Then at the end of the 14 days you can assess your spending habits and see if you really need to use your credit cards at all. Or if you only need them for certain expenses, like travel or buying online.
Everyone Else Is Using Them, So You Feel You Should Too
Credit cards didn't play a major role in our consumer spending until the 1980s. But we have quickly become dependent on them and crafted our spending habits with them in mind. Nowadays, 72 per cent of Americans have at least one credit card, with the average being three credit cards or more.
This peer pressure makes it easy for us to use -- and rely on -- credit cards, since it's such a commonly accepted idea. Not only is using credit cards socially acceptable, but so is having debt. However, if you want to build wealth and save for the future, you need to understand your own spending habits and money personality.
If you're a spender by nature, having access to a high credit limit could be cause for a financial disaster. Your neighbour might be a saver and can easily handle a credit card, but that doesn't automatically mean it's a good idea for you.
How to protect yourself: Evaluate the way you handle money and do some experiments on whether it's smart for you to use credit cards. Pay attention to what your friends are doing and see if their behaviour is indirectly influencing you to spend more or swipe that credit card more often. Finances are never a one-size-fits-all type of thing, so don't get caught up in the hype and think that just because everyone else is doing it you should be doing it too.
Interest Charges Keep You Treading Water
One of the biggest ways to keep yourself drowning in debt is to pay the minimum balance on a credit card with a high interest rate. It's like throwing money down the drain -- while your pockets are being depleted, you funds are padding the banker's account.
Let's say you see a really good sale on an item you've been needing for a while, so you buy it on your credit card and promise yourself you'll have the money when the bill comes. But the bill comes and you don't have all the funds to pay it, so you only send in half the money.
Instead of getting a discount on your item, you're actually losing money by paying usually around 15-20% in interest charges. This can be easily avoided by planning ahead or using the other strategies listed here.
How to protect yourself: One thing you can do is call your credit card company and ask them to lower your interest rate. They might not always approve your request but in many cases they are open to working with you, and it never hurts to ask.
You can also consider using a promotional balance transfer that comes with a 0 per cent interest rate, or even a debt consolidation loan. While these strategies are not right for everyone, they might offer you a chance to get an interest rate far lower than the average 20% interest your credit card company will charge you.
They Block You From Pursuing Other Goals
When you strictly rely on credit cards to make all your monthly purchases, it can be difficult to stick to a budget. Before you know it, you've spent $5 here and $20 there, then it all adds up to several hundred dollars and you have nothing to show for it.
This can create leaks and holes in your budget and hinder you from ever making progress on your financial goals. Even if you pay your bill on time, and you are careful about spending, there's still a chance you could pay a bill late or need to pay for an emergency that pops up. Next thing you know, you're chasing your money instead of having control of it.
How to protect yourself: Put your financial priorities first by limiting the use of credit cards. Readjust your mindset so you no longer view credit cards as part of your monthly spending routine. When creating your budget, only use the income and funds you currently have saved to pay your bills -- leave the credit limit out of the equation.
Carrie Smith is a guest blogger for ReadyForZero. She's the writer and editor behindCareful Cents, a blog aimed to help solopreneurs and full-time freelancers make valuable connections and grow their businesses. Find her on Twitter@carefulcents.