How to Use Your Credit Carefully

Using credit cards and other credit facilities can sometimes seem like the easy way to get the things you want now, but the reality is often a little less simple. It’s important to learn how to use your credit carefully so that it doesn’t take control of your entire financial situation.

How Using Credit Carefully Can Give You Control Of Your Financial Situation

By using credit carefully, it’s possible to take control of your financial situation and avoid the pressure caused by financial stress. Unfortunately, far too many people don’t really understand the implications of taking on more debt than they can afford.

Before You Borrow

Before you sign a credit contract to borrow money, either on a loan, a mortgage or a credit card, it’s important to take the time to read the pre-contractual agreement given to you by the lender.

This agreement should outline in plain English the exact cost of fees, charges and borrowing costs associated with your loan. It should explain the exact interest costs, any fees or charges associated with your account and any other fees you could incur by not maintaining your contractual obligations. These can include late or missed payment penalty fees, default interest rates, early prepayment fees, monthly account fees, annual fees and other charges.

Of course, your contract will also let you know exactly what your minimum monthly repayments are expected to be. This lets you know whether you’re able to afford the loan or not.

Reducing Interest Charges

Most people never even consider adding up the total interest costs of the amounts of money they borrow, but if you did, you’d be horrified by the amount you spend in just interest charges on outstanding debts.

What most people also don’t realise is that the interest charged to your account is usually calculated on your outstanding balance daily and then shown on your monthly statement in arrears at the end of each month.

By reducing your balance more quickly, you can reduce the amount of interest you’re charged on the amounts of money you borrow. The easiest way to reduce your balance quickly is to make sure you always include room in your budget to pay more than the minimum payment due each month.

This can reduce your interest costs and pay off your loan more quickly. However, be sure to check your credit contract to be sure you won’t be charged high prepayment penalty fees for repaying your loan before the agreed loan term.

Shop Around

Most people spend time shopping around for the best price on electrical items or household purchases, or they’ll test drive various models of cars before choosing the right one for them, yet they don’t spend any time checking out the loan or credit card they’re about to spend their hard earned money on.

It’s important to shop around and find the right credit terms to suit your specific needs. Depending on your financial situation, you might consider looking for low interest terms that may help you reduce costs or fixed interest rates that can help you budget over the longer term.

Facing Financial Difficulties

At the time you took out your loan or credit card, you may have been doing fine financially. However, everyone goes through periods of financial difficulty throughout their lives.

If you believe you’re going to miss a payment or be late making your payment by the due date, make a point of calling your lender or finance company and letting them know. Be up-front with your creditors about any problems you’re facing and they’ll be more likely to help you where they can.

For example, if you’re ahead on your repayments, your lender could freeze your repayments and use up the excess amount instead, giving you time to get back on top of your finances again.

Signs That You Are Not Using Credit Carefully

There are some warning signs that your credit situation is spiralling out of your control. Keep watch for these signs and make sure you reign in your spending habits before your credit becomes a real problem for you.

If you constantly find your credit card balance close to your available credit limit and you’re having trouble reducing your outstanding balance, then you may have a problem. This could signify that you’re spending more than you can afford or it could mean that your credit payments are eating into your cash flow more than you are aware.

Another warning sign to watch for is the need to draw cash on your credit card, or use a cash advance. If you need to withdraw money from your credit card, then this can be a warning sign that your finances are no longer within your control. It’s time to work out ways to regain control of your finances again.

Tips for Using Credit Wisely

Using credit doesn’t have to be a precursor to financial misery. In fact, when used correctly, certain types of finance can be very helpful and could even help some people to leverage assets to take advantage of further investment opportunities and wealth creation strategies.

Unfortunately, the majority of people who use credit tend to hold ‘bad debt’, or consumer debt, which costs you money each month and takes over your financial situation rather than helping you.

If you’re trying to understand using credit wisely, then there are some key things to keep in mind.

Many credit cards offer interest free days. If you’re disciplined to repay your outstanding balance in full each month, then you could benefit from using your lender’s interest free days to your own advantage. You get to benefit from the use of credit, but you won’t be charged any interest if you keep up with your repayments.

You should also remember that your credit card is not designed to withdraw cash from. If you feel that you need the money so badly that you opt for a cash advance, be aware that the interest charges will begin accruing from the same day you withdraw, often at much higher rates than purchases or balance transfers.

You should also make an attempt to pay for the items you really need using cash where possible, or saving for the item in advance, rather than simply buying on impulse using your available credit limit.

By using credit wisely, you can maintain control of your financial situation and avoid facing a future filled with financial stress.

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