Without doubt, since the world’s first credit card, issued by Diners Club, credit cards have become an integral part of our lives. Some people swear to have only one credit card, whereas others are committed to having different credit cards for different purposes and needs. Nevertheless, using credit cards unwisely can potentially lead to great money losses, increasing debt, reduced credit rating, up to complete insolvency.

Credit cards exist with many different features and terms and conditions, but they have one thing in common: they will usually cost money in one way or the other. Either credit cards come at an annual fee, or you will pay charges or interest on monthly installments, ATM withdrawal fees, or foreign exchange fees when abroad. For this reason, credit cards should be handled with great care, always aiming at holding a grip on one’s own personal finance.

The best way to manage credit cards is to simply have only one credit card. Credit cards are a necessary feature in many situations, such as when renting a car or conducting online purchases. However, when you have only one credit card at your disposal, it is much easier to overlook the associated expenses. Firstly, many banking institutions issue credit cards free of charge, usually provided specific conditions are met. You will need to do some research, but on the long run this might save you some cash annually; why pay for an annual fee for a credit card if you might not even use it during a given year? Additionally, the terms and conditions may vary greatly for each issuer. This includes ATM withdrawal fees, foreign exchange fees, or fees when you lost your credit card or when it becomes stolen.

One of the biggest dangers of credit cards is the temptation to spend more on items, and to pay back the money using installments. Banks will usually always ask some form of late payment fees, for which yearly interest rates are far from moderate. On average, people will spend 25% more money on items bought with a credit card than they would have otherwise when using regular cash. Additionally, since the money is not immediately debited from the bank account, individuals tend to lose their reality for the spent money. At the latest next month, when the bill arrives, people see the real consequence of their spending. This causes a new problem: due to the mindless spending, people may need to pay items with a credit card again, since otherwise they would not have the required money on their bank accounts.

This spending pattern may result in a mean and vicious circle, causing people to slide into debt even deeper. In such an event, it is not uncommon, that people start applying for additional credit cards in order to create an imaginary spending freedom; the realization that unpaid debt is accumulated is suppressed, and people start living off debt in stead of equity.

Credit cards can offer some necessary freedom, but they can also be quite dangerous for those with poor personal finance capabilities. Therefore:

• Commit yourself to owning only one personal credit card, and stick to it. Do you research as to the pricing and terms and conditions, in order to pay the least possible fees.
• Track all your credit card expenses. Credit cards tempt to mindless spending, but the money will be debited in one way or the other.
• Always pay your bills online. Paying late or using installments creates additional, unnecessary interest, making it harder to pay off debt. In the end, you purchased an item or service, so you will need to pay for it.
• When you are about to purchase an item with a credit card, think about your motivations. If using the credit card is the only possible way to pay for the service (think about car rental services or online shopping), then go ahead. But if your sole motivation is because you do not have the necessary cash to purchase the item otherwise, what makes you think that you will have the financial means next month? Or the month after that?
• Think about your motivation about shopping general. Do you shop because you truly need specific items, or do you shop because it makes you happy and feel good? In the latter, it may be well possible that you are simply burning your cash on items you do not really need. In this case, you may think about thinking over your motivations to go shopping, or in extreme cases think about counseling.

This article is also available on The Man Experience.

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