Can you imagine a lifestyle of not having easy credit readily available to you? When cash flow is short and emergencies arise, credit cards come very handily for such situations. Credit can be helpful, useful, and dangerous--all in one if you are not careful.
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The first type of credit acquired by consumers are those plastic cards we swipe and later owe the financial institution money. Credit cards are short-term solutions with potential long-term effects. Such effects include overly high monthly principal payments and monthly debt payments, mid-to-high interest rates, and reversing your income building potential.
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This type of debt carries what is known in the financial industry as Revolving Debt. According to LendingTree.com, "revolving debt consists of open-ended accounts, usually with variable interest rates, pre-determined credit limits, and payments that are calculated as a percentage of the unpaid balance".
Unlike a regular automobile loan or most mortgages where the interest is usually fixed and the monthly payments remain the same, credit cards can fluctuate its rates. One month your rate may be 12% but the following month it may be 12% + market rate (3.25%).
This is one reason why credit cards can be dangerous.
The other reason is the minimum payment due. As rates increase, so may the monthly minimum amount each month. One month your minimum payment could reflect $200 while the next month you may $400!
When you are budgeting your finances, it can be very difficult to forecast this payment. If you under forecast, it will offset another item from within your budget. This is why I highly encourage my readers to get mentally strong and recognize that your debt should be paid off as fast as possible.
You may be thinking to yourself now..."I received a 0% interest for 12 months in the mail. Do I take the offer?" I think it is something to consider if you understand that opening a new credit account will lower your credit score potentially by a few points in the first few months. Also, you must be disciplined enough not to use the available credit from the card you transferred the balance over to the new card.
A very common mistake that households make when receiving such offers is once a credit balance with a high-interest rate is transferred to a zero percent introductory rate card, they "perceive" available credit as an opportunity to spend more on the old card. Don't do this! It defeats the point of the transfer and now instead of having one monthly payment, you will have two payments.
This is why credit cards can be dangerous.
Other types of credit may be used to purchase a home or an automobile. It is highly encouraged that if you are mortgaging a home, then strive for a 15-year fixed mortgage. Most household budgets can't afford this so they turn towards a 30-year mortgage and almost always accept the point that they will pay twice as much for the house in that time frame.
When it comes to auto loans, it is always best to avoid getting an auto loan but Simple Dollar has a resource available "Best Auto Loans for 2018" to help get you started so if you need to borrow, you can do it responsibly.
It all boils down to your self-discipline. Continuous spending increases your lifestyle. The trick is to find a balance and maintain your lifestyle for as long as possible.
The theory is as more income comes your way, you are saving it for the future. When you try to keep up with the Jones's, you outspend, overspend, and get into financial trouble. Recognize that it is okay not to have everything and start to condition your mind differently to live more simple.
If you have a common tactic or mind trick that has helped you avoid using your credit card or getting into debt, please share it in the comments below.