3 tips to avoid falling into credit card debt

3 tips to avoid falling into credit card debt
Source: Pexels, Anna Shvets

Resisting the temptation to make the most of sales is a difficult feat. It seems as if every year, fewer of us manage to avoid splurging on products that we may not need – according to MagnifyMoney, the average American racked up $1,325 of holiday debt in 2019. Even with the economic impact of COVID-19, there’s no doubt that credit cards make it much easier to rack up debt on items we may not truly be able to afford.

In fact, 48% of people polled in 2020 were willing to go deeper into existing debt while holiday shopping. With the average credit card interest at over 16%, one can only imagine what devastating impact this last holiday season could have on the future financial stability of these individuals and their families.

Naturally, online stores tailor promotions and sales throughout the year to be irresistible, but you should avoid falling into the trap. Here are three tips to help you benefit from your credit without falling into credit card debt.

Don’t buy it if you can’t afford it twice

Many of us buy and then worry about how we are going to afford it at a later date. But then that date looms, and suddenly we have been caught in the credit card trap. According to Beverly Anderson, President of Global Consumer Solutions at Equifax, the reasons for this happening are quite predictable, as we all make very similar mistakes.

To be in complete control of your finances, a budget is an essential tool. You may be in a situation where you want to make a purchase urgently, but unless you predict your outgoings and income for the near future, you could find yourself struggling to afford it. Whether you choose to focus your budgeting on a monthly, weekly or daily basis, it can help to identify areas where you can trim costs and save for larger purchases.

Aside from budgeting issues, unexpected deals on high-value items can also put us in credit card trouble. The problem with these purchases is that it’s hard to budget for them, so it’s important to prioritize which payments you simply can’t afford to miss. If you miss a payment on something expensive, it can have a negative trickle down effect, where more pressure is put on other outstanding payments.

Lastly, there are so many “fake” discounts and psychological tricks out there – where you think, or convince yourself, that you are getting an unmissable deal. For example, you may get a gift card from a coffee shop which gives you a discount on the eighth cup of a particular type of coffee. However, you have to question whether you are buying the coffee you want, or going to end up paying for a potentially more expensive coffee that you wouldn’t otherwise pick.

Resist credit card bonuses

A recent study looking into the willingness of people to pay with different payment methods showed that we are considerably more likely to overspend when using a credit card when this option is available. When there are additional credit card incentives thrown into the mix, it makes it even harder to resist, such as airline points for spending a certain amount with a credit card. Make sure that when you are reviewing sign up promotions, there are tangible and realistic benefits for signing up that actually benefit your preexisting spending habits, rather than exciting but empty promises.

It’s crucial to be particularly wary of this during holiday and promotional seasons, as many credit card companies partner with retailers to offer deals such as “spend over $100 and receive 10% cashback.” These seem like attractive bonuses, but they only exist to help you justify a purchase, which is a dangerous road to go down. It is worth examining the various offers closely before jumping at deals which are motivated by attractive discounts.

Find an alternative

If you know that you are going to make a big purchase, you should do so in the knowledge that there are credit-free alternatives available. For example there are Buy Now, Pay Later (BNPL) solutions that allow you to split payments over installments without affecting your credit score. This means your account doesn’t have to take a big hit upfront, enabling you to budget your purchases better and execute a more balanced and responsible holiday shopping strategy. If you space out your payments over a period of time, it can be a relief to your wallet, but it is important to still account for these payments when creating your budget.

There are also a number of digital-only banks which allow you to create specific wallets for regular payments such as groceries, utility bills and entertainment. These solutions instantly send you notifications when you have spent money and indicate the remaining funds for your pre-assigned categories. Some of these digital-only banks can also send you warnings about your spending habits, and they can even put a block on your account if you go over a self-created limit.

Bearing these tips in mind whenever you are shopping will help you to avoid falling into credit card debt. If you create a budget and stick to it without being tempted by deals which may pop up, then you are less likely to be tricked by seemingly shiny deals which you don’t need. Furthermore, you could look at BNPL solutions and digital-only banks to ease some of the burden on your credit card. While there is no guarantee that these steps will completely help you avoid falling into credit card debt, they may contribute toward you feeling more financially secure.

This article was written by Chaim Lever, the Co-Founder of Four, the split-payment platform for the new generation of shoppers and spenders. With a background in behavioral psychology and marketing, Chaim is providing the most advanced payment system to accommodate the dramatic shift in consumer spending behaviors, while also driving the retention and conversion rate of online consumer brands.

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