There are many benefits to using credit cards, provided you exercise caution at all times.

For starters, credit cards serve as virtual cash and are accepted at land-based merchants (POS terminals) and e-commerce retailers the world over.

The convenience and security of credit cards makes them especially enticing to customers.

Unfortunately, it’s a double-edged sword. With all this power, comes great responsibility. All too often, people will find themselves spending money that they don’t have, and ending up indebted to credit card companies. Credit cards are associated with higher APRs than traditional loans. Since these are unsecured lines of credit, the risk to the lender is greater and that is the reason for the higher interest rate.

Understanding Your Credit Score and Protecting Your Credit

Credit scores are comprised of multiple categories such as your available credit, your payment history, the length of your credit history, the number of inquiries, the type of credit you have etc. The better you score in each category, the higher your overall credit score. Good credit scores and excellent credit scores are associated with lower rates of interest from top lenders. People with average or poor credit scores tend to qualify for higher interest rates and less favourable terms and conditions.

A line of credit is a privilege and not a right. Once you have access to credit facilities, you must safeguard your credibility to ensure that you don’t default on your payments. Credit bureaus in the United States offer 1 free credit report per year to customers. The big 3 credit bureaus include Experian, Equifax, and TransUnion. Customers can also access their credit scores from certain banks and/or credit card companies. In the US, the FICO (Fair Isaacs Corporation) scoring system is in play for most credit card companies.

What Happens If You End up in Trouble?

One of the biggest problems for people with credit cards is overspending. If you find yourself spending too much, you’re not alone. According to statistics, Americans tend to spend $1.33 for every $1 that comes in. It is also a well-known fact that Americans on the lower end of the spectrum are indebted to the tune of $7100 in monthly credit card bills. If this sounds all too familiar, you may be a candidate for a debt consolidation loan.

This type of loan is especially beneficial if you find yourself reaching ‘saturation point’ with your credit card debt. A debt consolidation loan is offered at a lower interest rate than the prevailing APR on the credit card debt. Plus, the money savings generated from the single debt consolidation loan can be put to better use paying down the principal, or investing in savings or retirement account.

How Not to End Up in Debt Again

Fortunately, there are many ways to guard against excess expenditure, the first of which is the establishment of a budget. A budget is a financial plan that allocates fixed expenditure to multiple categories of your day-to-day life. Credit cards are part of that budget, and should be used sparingly and judiciously. Credit card debt in the US now tops the 2008 level at well over $1 trillion. In the United Kingdom, credit card debt is also increasing at a rate of knots. It is unsecured debt, and it comes at a high interest rate. Credit card debt is considered bad debt, unlike student loan debt or real estate (mortgage debt) which is considered good debt.

But before you consider the panacea to this pervasive problem, it’s important to understand the reasons why there is overspending in the first place. Most people tend to spend more for the following reasons:

  • Modern-day society encourages excess spending
  • Credit card spending allows for instant gratification
  • Retail therapy masquerades as a short-term solution to deeper problems

Good financial management goes a long way to a life well lived. Managing credit card debt and living beneath your means is the only viable solution to a stable and prosperous existence.