Tips to Avoid Credit Card Debit in Future

“Australian’s household debt nears the highest worldwide” according to Finder (see figure 1). Australian household debt has steadily risen over the past three decades as more of us aim to own homes and continue to rely on products such as car loans and credit cards. In fact, the ratio of household spend to income has more than doubled between 1995 and 2015, going from 104% to 212%, according to the OECD Data released in 2015. This means if the average person earns $80,000 net, they are spending $169,600 per year. While many other developed countries have seen a decline or “levelling out” of personal debt since the 2008 global financial crisis, Australia’s debt levels have continued to increase. As a result, Australia is now reported to have some of the highest personal debt levels in the world.

Credit card debt can be avoided, as long as you maintain spending and payment habits that help you avoid getting yourself in over your head.

Figure 1. Australia’s Household debt contrast to other countries.

Build a Safety Net

Without access to emergency savings, a credit card may be your only option to save you from a major car repair, medical bill, or other unexpected expense.

While it takes time to build savings large enough to cover six months of living expenses, starting with a small amount like $500 or $1,000 can help you take care of those little expenses that pop up. You can build your emergency fund steadily over time rather than having to rely on debt to rescue you.

Stick to What You Can Afford

Access to credit can be tempting when you spot items you want to purchase but really can't afford. While you might rationalize that you can easily pay over time, promising your future income is risky. A better habit: save up for things you want rather than putting them on credit and only swipe your credit card for purchases you can afford to repay right away.

Avoid Unnecessary Balance Transfers

Transferring a balance from a high-interest rate credit card to one with a lower interest rate is a smart move to pay off your balance at a lower cost. However, transferring balances to outsmart the credit system, for example, to avoid a payment due date, can backfire. Repeatedly transferring balances without paying off a significant portion of the balance can lead to an ever-increasing balance once the balance transfer fee is tacked on.

Always Pay on Time

Staying on track with your credit card payments is one of the best ways to avoid credit card debt. Once you miss a payment, your next payment due will be much higher since you'll have to make two payments plus pay the late fee. It gets tougher to catch up, puts a strain on your budget, and tempts you to use your credit cards to make ends meet.

The late fee for one missed payment can be up to $29. A second missed payment in a six-month period can incur a fee as high as $40, depending on your credit card. And two missed payments in a row can trigger a higher penalty rate and cause a spike in your monthly finance charges.

Pay Your Full Balance Each Month

Paying your entire balance each month is the best way to avoid credit card debt. Starting with a zero balance each month completely eliminates the risk of getting into credit card debt. You never have to worry about whether you can meet the minimum payment because your credit card has already been paid in full. To pull this off, you have to be disciplined and only spend as much as you can afford to pay off in a single month.

Know the Signs of Credit Card Debt

Recognize the ​early warning signs of credit card debt allows you to pull back on your current spending habits and replace them with moves that benefit you in the long run. For instance, if you notice your credit card balance is too high to pay in full, it's a sign that you've been charged too much. Curbing your spending until you've paid off the balance will prevent you from making your debt worse.

Avoid Cash Advances on Your Credit Card

In a moment of desperation, you might consider taking out a cash advance on your credit card. However, it's one of the most expensive credit card transactions with a transaction fee, higher interest rate, and no grace period for avoiding finance charges.  Lack of access to non-debt money sources could signal serious financial trouble.

A cash advance usually is one of the early stages of credit card debt. Work on fixing your budget and create an emergency fund so you don’t have to use a cash advance in an emergency.

Don't Lend Out Your Credit Card

You're ultimately responsible for all charges made to your credit card and lending your credit card puts control of your credit card balance with someone else. If they go on a spending spree and refuse to pay up, your credit card issuer still holds you accountable for repaying that balance.

Understand Your Credit Card Terms

Your credit card agreement spells out everything you need to know about using your credit card—how interest will be applied, the fees you'll be charged, and when. Understanding these features of your credit card can help you avoid credit card debt because you understand how using your credit card costs more.

You can review the credit card terms before applying for a credit card. Contact your credit card issuer for a current copy of the terms of any existing credit card.

Limit Your Number of Credit Cards

The more credit cards you have, the greater the opportunity to get into debt. Even if you have solid self-control, it's better not to tempt yourself with thousands of dollars in available credit. Reducing the number of credit cards in your wallet not only helps you avoid credit card debt but also makes it easier to manage your monthly bills.

Source: Irby, L. (2020, September 30). 10 Ways to Avoid Credit Card Debt. The Balance. https://www.thebalance.com/avoid-credit-card-debt-960043