Credit cards: how to avoid high-interest costs
Within the personal finance realm, credit cards are among the most controversial discussions. ‘Is it a good thing to have a credit card? Am I broke?´, could be some of the questions that you may ask yourself before getting one. One of the reasons why they are a bit scary is the INTEREST.
Whenever you use a credit card, the bank will you some payment options: the minimum, the total spend in 30 day period or the total amount spent at the moment. Because credit cards are based on the money loan premise so you can afford immediately something that otherwise would take longer, the bank uses credit card charges.
The interest is the fee, usually a percentage, that the bank charges to loan you this money. This fee may vary between 14% and 18%, depending on the bank and how long you had the bank account. If instead of paying the total amount spent in any given period, you choose to pay the minimum you will see that the bank will charge you the interest.
Since credit cards work as an immediate loan that you have available in your wallet, it is not rare that many people stop perceiving it like that and go over the limit instead. That’s when the interest accumulates and paying back the money becomes harder. In the end, you will end up paying much more than you should have in the first place.
How to break the cycle
When having a credit card, the first thing to do is shifting your mindset on how you see them: it not an extension of your bank account. To pay the credit card, you depend on the money that you already have available.
The ideal thing to do is to pay it monthly what you have spent in that time, but it is also true that you might not always be able to do so and you will have to pay the minimum. It’s not a bad thing if it happens once or twice but it can’t become a routine.
Whenever you are about to use it, think about the money that is already available in your bank account and, if you didn’t have a credit card…would you do the purchase that you are thinking about? It is understandable if the charge is a consequence of an emergency, for example, the coronavirus situation. However, if it’s to acquire goods that you wouldn’t be able to do so if it wasn’t for the credit card, you might want to check your behavior as a consumer so you can avoid losing control of your finances.
Always keep in mind that is a loan and if you are not in the capacity of maintaining a consistent payment, you will face a higher cost than you didn’t have in the first place. That is how credit cards might become a problem for you.
With all this being said, credit cards aren’t a bad thing. They help to build credit scores. But just like most of the things, you have to use them wisely so it doesn’t become an economic burden.