Check out the first two sessions of our Budgeting mini-series:
Part Three: Debts and Loans
The most important piece of information I can give you right now is this: Do. Not. EVER. Get. Into. Credit card debt. Seriously. I cringe every time I hear that someone “forgot” to pay their credit card bill, or just “didn’t seem to have the money to pay it off this month”.
If you cannot afford to pay off your credit card this month, then you cannot afford to buy whatever it is you’ve been buying with your credit card. Put the credit card away if you cannot control your spending.
Credit card companies make their money off of interest. The credit card company that I’m with has an interest rate of about 20%, and most credit card companies have interest rates of 10% higher than that. As soon as you get caught up with paying interest rates, you’re going to be locked in there for the long haul.
The other issue about credit card debt is that it looks very bad on your credit rating. This is problematic if, in the future, you want to invest in a big-ticket item. It is also an issue if you want to apply for a different credit card or any kind of loan. Credit card debt tells the banks that you don’t know how to manage your money. If you don’t know how to manage your money, why would they want to give you any?
If it’s too late and you’re already in credit card debt, then what you need to do is get out of debt NOW. Cut back on as much as you can (and I mean really cut back and pay only for the very basic of necessities) and live incredibly frugally until your debts have been paid. And then make sure to never get into credit card debt again.
The simple fact of the matter is that there is a serious problem if you find yourself unable to pay your credit card bills. Some people simply can’t have a credit card because they go crazy with spending. If you know that you’re this way, then deliberately put the credit card away and pay with cash as much as you can. It will be a good reminder for you to literally see the money being handed over, and when you’re primarily dealing with cash, you’ll only be spending money on what you can afford.
Credit cards are important, however, in order to build up credit ratings. When I applied for a bank loan for my condo, I had had my credit card for about five years, so I had the opportunity in the past five years to build up my credit rating. And it paid off: my credit rating was perfect; the only issue that the bank had was that I wasn’t making enough money (right now) in order to pay my mortgage (but that’s because I was only able to work part-time because I was a full-time student. Now I am no longer a full-time student. Please someone hire me). If you know that you can control your spending, having a credit card and using it for nearly every purchase you make is an excellent idea in order to build your credentials.
What happens if you can’t pay your credit card bill because there’s really next to no money in your bank account, but you don’t want to go into credit card debt? Bank of mom and dad Well, I’m only half-joking. Sometimes borrowing money from a close friend or family member is a good idea because it will give you more incentive to pay them back as soon as possible out of guilt; you wouldn’t want to leave them hanging. But if you do go the route of loaning money from a friend (in which case you won’t be paying interest), make sure that you also do pay them back immediately. And if you find that you’re still struggling to make ends meet, then it’s time to re-assess your lifestyle and perhaps find a better-paying job.
As we discussed in Part One, be sure that you track any money that you loan from someone else (or any money that you loan to someone else). Check what debts you owe and figure out how to pay them back right away. Your bank account will be happy to pay far less interest, and your mind will be at ease.
How do you feel about credit cards? Have you ever (or do you still) struggle with debt?
Coming up next is Part Four: Eating Healthy on a Budget!