In this two-part mini series, I go through some of the basics of owning and using credit cards because financial literacy is very much needed in order to make your card work for you and not the other way around.
Having good credit standing will also benefit you in the long run when you apply for bigger and more necessary loans like house, car or business loans.
A credit card can be a source of power or a source of one's financial downfall and it all depends on how you use it. It is easy to swipe, but paying won't be too easy if you go beyond what you are capable of.
Here are some mistakes that will most likely drown a cardholder in debt:
Forgetting that it is not an extension of income.
One of the most common and wrong belief is that a credit card is an extension of an income. It is not. It is a liability that you need to pay for with actual money you earn or have in your account. It should not be a reason to elevate one's standards of living or spend more than what one has each month.
It should not be used to constantly cover for what your income cannot pay. Credit cards have interest rates, minimum payment requirement, etc. If you use it to cover the negative amount in your monthly income, you will end up using your money for the following month and this will continue on unless your income changes. Once you find yourself in this dark loop, it will be very difficult to get out of it.
Swiping more than what you can pay for.
Think of the things you do not normally buy without you card - the things that you cannot pay for in cash. These same things should never be swiped using your credit card even with zero installment offers because the interest rate covers the entire amount of your debt.
You should be able to plan out well what "allowance" or wiggle room that you have in your monthly income before you decide to swipe. If you can pay for the expense next month or within the month, then by all means go for it. However, if that expense you pay with your card will jeopardise next month's income, please don't. If it's just a luxury and not a neccessity, wait until you can actually afford it.
Allowing other people to use it.
Allowing other people to use your card with the promise that they will pay you back in a week or a month, it is the same as lending them money but the difference is that you don't hand over the cash. If you are going to let people use your card, make sure they pay you in cash on the same day and the most important thing is make sure that you immediately pay your card with that.
If you allow others to use your card and they don't pay you back, this will be a surprise expense on your part because the card is your responsibility not theirs so you have to pay for it by the time it's due. Unless this is a risk you are willing to take, I would highly discourage you from lending your card.
Funding a lifestyle using a credit card.
A person's lifestyle should be funded by their own monthly income and not a credit card. It is always wise to live within or below your means. Again, do not swipe for anything more than what you can pay for. Funding a lifestyle using a credit card is funding a lifestyle in debt - it will look pretty, but you know it's all rotten inside.
Certain aspects of a lifestyle like travels, partying, shopping, etc should be covered by the disposable income. It is the income left after you have paid for all the bills and have set aside for emergency or savings fund.
These "extras" in life are also best enjoyed when you have no risks to think about when you get home and check your statements.
Not looking at your statements.
Your statements are not only your basis for the monthly payments but is also a great way to keep track on what you have overspent the month before and to be able to plan out how you will pay your remaining balance.
Never, ever ignore what your statements. Ignorance is not bliss when it comes to debt.
I hope this somehow helps give you a general idea on what you need to avoid as a credit card holder. It's always better to be wise and to protect yourself from these mistakes.
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