Hello! Have't seen you 'round here before! You may want to subscribe to my RSS feed so as to keep up to date with money saving tips and product reviews, or you may wish to view the main Mungo Money website for UK Credit Cards, Personal Loans and Savings Accounts. Thanks for visiting!
Credit Cards are a necessary evil in this day and age. I say evil as although I like them, promote them and have several myself, if you do not manage the money on your credit cards effectively then you can end up in trouble.
Lets take the example of my friend Ben. Ben had never had a credit card and had never been out of the country before either. When the chance came for him to fly to Geneva for a friends wedding he was understandably excited.
As the day of his departure got ever closer Ben began to fret about his holiday money. Should he take all foreign currency or should he take travellers cheques? What if he ran out of money? What if he looses all of his currency?
I told Ben that I always take enough currency for the first two days and the rest in travellers cheques. Although I include some spending money in my travellers cheques allowance I always take my credit card to cover the bulk of purchases abroad. Not only do I not have to worry about loosing cash and cheques I also know that credit card purchases are covered by an insurance; so if a transaction goes onto my card that I do not think occurred, I can claim the money back.
So Ben applied for a credit card that very day and received his flexible friend before leaving for Geneva. Before he left I gave him on final piece of advice
Whatever money you spend on the card, pay it back when you get home. Remember, it’s their money you are spending, not your own. So pay it back, in full.
I caught up with Ben a couple of months later. He’d had a lovely time away but was now £3000 pounds in debt thanks to his continual credit card spending; a problem he placed firmly at my door!
The problem was that Ben hadn’t headed my final piece of advice. When he was away, wining and dining with friends, he was spending money on his credit card, but he forgot it wasn’t his money that he was using. When the credit card bill came through the post, Ben could only afford a fraction on what he had spent and so only repayed a small amount of his credit card debt. Only at this point did his credit card company begin to add interest to the outstanding credit card debt. If Ben had repaid in full (as I tried to warn him) he would have had no additional charges to pay. The credit card provider would have, effectively, lent him the money for a few weeks for free.
Worse still, now back in the UK, Ben thought he might like to upgrade his TV Set, he knew he didn’t have sufficient savings in his bank but now had a source of credit easily available to him; his new credit card. Before long Ben had racked up several additional purchases on his card and each month was niavely only paying off the minimum balance on his credit card debt.
When I learnt all of this I immediately tried to show Ben the error of his ways. Not only had he been silly to spend without being able to repay his debts, in full, within a month or two, but to continue to spend and only pay off the minimum balance was just crazy!
So Ben reworked his finances and began to make substantial payments to his credit card each month, meaning that within 18 months he would have virtually all of his credit card debt repaid. He also promised to put his plastic away in a drawer for strictly emergency situations.
The lesson to learn from Ben is that using a credit card is effectively spending someone elses money. If you can’t pay them back within one to three months then think very carefully about your purchases. Afterall, the credit card company is not giving you money for free and their inteest charges can come as a bit of a shock!
The other lesson is to never just repay the minimum amount. Repaying only the minimum credit card balance can help you stay in debt for an awful lot longer than necessary. Even if money is tight, always try to pay even £10 more than the minimum; this will help you clear your credit card balance quicker provided you don’t continue to spend!
Top Credit Card Tip
If, like Ben, you find yourself in several thousand pounds worth of credit card debt, the first thing you need to do is stop spending! With your debt now static, the only increments will come from interest charges. You now need to look at your budget very carefully and decide how much you can repay each month. Try to make it a sizeable percentage of the debt e.g. 5%. Now, apply for a balance transfer credit card. Many credit cards are offering 0% balance transfer offers meaning that your money will not accrue any additional interest within that period. You now have several months of grace to pay off as much of your debt as possible, meaning that by the time your new credit card provider starts charging you interest on the debt left on the card, it will be sufficiently small and manageable.
Best Buy Credit Cards
2 comments ↓
[...] As a young entrepreneur you need to realise that the money you spend on a credit card is not your own and that delaying repayment (or worse still failing to repay) can land you in hot water. [...]
Hello your article is delightful. I will definitely read your diary.. See ya
Leave a Comment