Using credit wisely is the best way to avoid debt. Incorporating wise spending habits in your lifestyle is the right way to use credit and stay out of debt. There are certain spending habits that lead to debt. Recognizing these habits now could save a lot of money and stress later.
1. Spending more money than you make.
Sound impossible? Think again. Although you may make $3,000 a month, you could possibly be spending $3,200 in a month? It’s easier than you think and you might be doing it. For example, if you are using your savings, borrowing from others, or using your credit cards to cover your expenses, you are well underway to spending more than you are making. Alas, this won’t last long. Before you know it, your savings is depleted, your credit lines are maxed out, and you can’t borrow any more money.
2. Spending money you don’t have.
You spend money you don’t have by using credit cards and taking out loans to pay for your expenses and other things but did not have enough money to pay for it at the end of the month. When you use these credit lines pay bills and make purchases, you’re creating debt. If you can’t repay the debt each month, it will continue to grow. If you have made a purchase that is planned to be repaid over time this is ok, but be careful you don’t take on too much debt all at the same time. This will come back to bite you later.
3. Using credit for ordinary purchases.
Making everyday purchases like groceries, gas, clothes, and entertainment is appealing because you have the ability to pay later for items that you buy now. Unfortunately if you are like most people, you are less likely to pay your credit card bill in full for items that you’ve already consumed. Don’t use credit in place of cash for ordinary purchases; it is a bad habit. Unless there is some extraordinary need, try to get in the habit of thinking ‘no cash no splash’.
4. Using credit when you have cash.
People like to consider that they are benefiting when they buy on credit because they feel that they are leveraging other people’s money. In most cases this is correct. But if you pay late on your credit card then the late fees will erase any benefit you might have gained. The reality is that if you don’t want to pay for it today, you will probably not want to pay for it tomorrow. Because of this, saving your cash today can cost you cash tomorrow.
5. Using debt to pay off debt.
When you use one credit line to pay off other credit line(s) you are really not paying off anything. You’re just shuffling your debt around and incurring more debt each time you do so. New credit lines usually come with some sort of placement fee so when you use debt to pay off debt, you end up worse off than when you began because you have only successfully increased your debt.