Debt and How to Avoid It
Debt is a deferred payment. For instance, when you buy a product using a credit card or loan, you are expected to repay it later. This also includes student debt and mortgages.
10 ways to avoid debt:
Use cash. When it comes to buying everyday items, cash is easier to record and does not follow a buy now, pay later method. When you purchase a product with cash, there is no risk of spending more than you have.
When it comes to credit cards, pay more than the minimum payment every month, and in full if possible. Although you are only required to pay a minimum balance of your credit card account, the remaining figures pile on interest and debt. If you are able to pay off your credit card in full every month, there will be no additional interest to pay.
Do not pay cash advances with a credit card. A cash advance is money burrowed against your credit card’s line of credit. If you pay for credit with credit, it will increase your interest and debt exponentially.
Have a spending budget. If you cannot afford it, do not buy it with a credit card.* The purpose of a credit card is not only buying now, but paying it back later. If you cannot pay it back later, it can lead to life-long debt. If you are sure that you cannot afford something, credit cards will become a burden.
Do not apply for more than 2 credit cards at once. When you apply for multiple credit cards at once, it is a sign of risk to lenders and could potentially harm your credit score. Applying for multiple credit cards could indicate to lenders that someone is not planning on repaying this credit.
Avoid credit cards and loans with high interest rates, no grace periods, or have no fraud protection. These specifications in a credit card agreement are there to help the buyer. Without a low interest rate, buyers can be charged too much in interest. Without grace periods, buyers are given less time to repay their credit before interest begins. Lastly, without fraud protection, buyers are held responsible for any actions and payments made without their consent.
Avoid bank overdraft fees. Bank overdraft fees occur when you spend more than what is actually in your account. The bank can charge you around $35 for every transaction, which means that multiple purchases in one day can cost multiple charges. In order to avoid this fee, you can sign up for overdraft protection which can transfer money from another account when the original has run out, or automatically decline the transaction. This of course comes with another fee, but for many the prevention is worth the cost.
Record credit card purchases. Repayment of your credit card is an important part of avoiding debt. If you record your purchases, it is easier to keep track of how much you have spent and how much you can afford by the end of the month. An online resource you can use is a Debt Repayment Calculator.
Have an emergency fund. No matter how much money you have to save, it is enough to start an emergency fund. Whether in a savings account or in cash, having an emergency fund can help you in times of need and when a salary is not guaranteed. That way, you can avoid debt by having an additional plan.
Compare prices of items you want to purchase. When you compare prices, you can save money by choosing the option that is the most effective and the least cost. Although it may only be a small change, people can have extra cash to save for retirement, invest, and buy something new.