Credit card disaster

For most of us credit cards are easy to acquire and easy to use as almost every place of business accepts them. 

In and of themselves, credit cards are not bad and can be viewed as tools of convenience when used with a disciplined approach and the responsibility to pay.  

To be honest, they have almost become a necessity especially when making hotel reservations or booking airline tickets.  

One of the biggest perks that most companies offer are free benefits such as extended warranties, car rental insurance or travel rewards.

However, it is important to be mindful of the dangers of credit cards before getting one or continuing to use what you already have.  

One of the reasons credit cards are dangerous is that many people view their credit card limit as available cash and treat it like a bank machine.  

This creates an illusion of liquidity as they tend not to think of the credit card balance as something that is owed to the credit card company and must be paid. 

Your credit card limit is  not meant to fill a gap in what you are earning in order to cover what you wish to spend.

Seven warning signs of credit card danger:

1. You receive your credit card bill and cannot pay it in full. 

2.  You are using your credit cards out of necessity, rather than convenience. 

3. You see an upward trend in your credit card debt. 

4. You are only paying the minimum payment or just over the minimum each month. 

5. You are thinking about financial problems almost every day. 

6. You are transferring balances from one credit card company to another. 

7. You have multiple credit cards that all carry large balances.

Putting a credit card in the hands of an irresponsible spender will lead to problems as credit cards give instant gratification.  They give us the ability to get what we want now and pay later.  

One of the most difficult financial lessons is one of delayed gratification. I grew up in a family who used cash for everything and the only debt owed was the mortgage on their home. 

I remember hearing my parents say on countless occasions “we can’t afford it” or “if you want to buy it, you’ll have to save your pocket money”.   Anyone can become more responsible with their money once they are taught how to manage it.

If you don’t pay off your credit card balance at the end of the month then you will start accruing interest anywhere from 8.5% to 19.75% per annum, charged on a monthly basis. 

Once this occurs, the next payment you make will be the balance plus all the interest that has accrued. 

Compounded month after month, it becomes a vicious cycle. On top of the monthly charges, most cards have an annual fee which can range from $50 — $150 annually so it’s important to understand what benefits you get from actually paying a credit card company an annual fee to use their card.

At the end of the day it really comes down to this; if you choose to use a credit card, use it wisely and never use your credit card if you can’t afford to pay it off in full at the end of the month. 

Carla Seely is a senior wealth manager at AFL Investments.