Is Your Credit Card A Financial Tool or is it an Instrument of Financial Ruin?
Having a credit card is a liberating thing, even a sign of prestige. “Charge it!” Says the customer. “Charge it!” Says the retailer. “Charge it!” Says the bank. And, oh boy, do we charge! Financial experts agree that an inordinate percentage of South Africans are in debt over their ears. We spend money that we do not have and much of this spending is done with a credit card. Many South Africans are therefore forced into using a large percentage of their monthly earning simply to service their credit card debt.
The dangers of debt
Using a credit card is not necessarily a bad thing. If it is used responsibly it can be a very useful financial tool. If you use your credit card to buy luxuries, however, you are travelling on dangerous grounds. Do you face one of these dangers?
- If you pay more than 30% of your disposable income on credit card debt the warning lights should flash. Those in this position most probably do not have the ability to save or to build up sufficient funds to deal with emergencies or to make adequate provision for retirement.
- If your monthly income is not enough to completely cover your credit card debt you are spending more than you are earning. Sooner or later it will become impossible to service the debt. This may lead to desperate and expensive actions such as taking out a second mortgage or applying for loan. Experts agree that such actions almost always lead to financial ruin.
- If, at any time you have to use your credit card because you have no other way of paying for necessities you are already in deep trouble.
It is never too late to take control over your finances. The first and most important step is make a firm decision to get rid of credit card debt. You pay an incredibly high interest rate on this type of debt and it would be foolish to incur more debt to cover credit card debt.
The next step is to manage your spending. Financial advisers agree that failure to develop a realistic budget and failure to adhere to such a budget is still one of the most basic sins South Africans commit. A budget can help you to limit impulse buying.
If you use your credit card wisely you can save money, but if you use your credit card irresponsibly you may be digging a hole from which you may never escape.