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There's nothing wrong with borrowing money. In fact, there are a lot of instances where it makes sense to put a purchase on your credit card. Things like rental cars, airplane tickets and large ticket items that need purchase protection should be put on credit. To avoid getting into credit problems, you need to learn what qualifies as creditworthy and what purchases should be paid in cash instead of potentially leading to unmanageable debt.
When you want to make sure you are borrowing wisely, there are a few pieces of advice that you should follow.
When is it reasonable to use your credit card on purchases?
Remember the term desperate times call for desperate measures. Just because a store is having a 50% off sale doesn't mean that it's a desperate time. Your use of a credit card should directly relate to your ability to pay the statement in full when the bill comes. If you haven't budgeted correctly when the card comes, you begin to finance the purchase. As the compound interest rates begin to compound month after month, you find yourself sinking further and further into debt.
Are there purchases that should not go on a credit card? Why should consumers avoid these?
Some of the daily, insignificant items can add up fast. Stopping to get a coffee and donut may only cost $5 at the register, but it's going to cost more in the end. Because of interest, that amount could be doubled or tripled by the time it's paid off. If you had to pay $15 for the coffee and donut up front, you would never pay it, so keep that in mind.
What are some smart borrowing tips that can be shared?
1. Use low interest rate credit cards as opposed to the loyalty cards. Points and miles may be good, but they come at a cost. If you carry a balance on your card each month, you're more than likely going to pay more in interest than you will see a benefit from the accumulation and use of any points that you may get on the card.
2. Distinguish between what you want and what you need. If you don't absolutely need it, think twice before you put it on a credit card. The only variation to this is if you have budgeted for the item and can pay the balance off next month when the statement comes.
3. Look into the future a little bit. If there were some unexpected expenses that are coming up, plan for them accordingly. They likely caught you off guard last year, so this is your chance to make sure it doesn't happen again. If they catch you off guard again, it's likely that they will go on your credit card, making matters worse for you.
What steps can be taken to manage finances if you do go into debt?
The average person knows exactly what they make on a monthly basis. However, few people don't know how much they spend or how much has already been committed. A personal budget needs to be established because it is essentially your road map to success. If you can list what comes in and what comes out, you can avoid overspending.
The big ticket items are never the problem. You know what your rent or mortgage is, your car payment, your cell phone and all of your other monthly bills. It's the smaller items that can get you into trouble. The periodic lunch out, a gift for a friend and some of the school-related expenses for the kids are what really adds up. It's best to put in a line item for things you buy on a regular basis, such as meals out. Then a line item of miscellaneous can protect you on some of the other expenses that accumulate each month.
Spending needs to be controlled. You have to make the decision every month as to where your money is being spent. A smarter and more informed decision needs to be made each month. You aren't going to be able to have it all because you can't afford it all. Instead, decide what things are the most important to you. Would you rather go out to lunch or manage your debt?
Credit cards can be very helpful to have, but they can also get you into a lot of trouble. It all comes down to managing the process. If you only put certain things on your credit card and pay down the balances on a regular basis, you will be just fine.