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Credit Cards: Invisible Money = Weapons of Mass Destruction

Credit cards are invisible money and this is what makes them the financial equivalent of weapons of mass destruction. We end up spending money that we don't have to buy things that we necessarily don't need…and, all this leads to a lack of financial stability regarding one's personal finances.

Credit card marketers exploit the basic consumer psychology that if we don't have to pay for something immediately, we might be more inclined to buying things. Cards instantaneously make the unaffordable into the affordable. Without realizing it, many of us end up living beyond our means as a result of spending this invisible money. And this is when the problems begin.

The biggest problem is that credit card debt is expensive. In fact, it is probably the most expensive form of consumer debt. Card issuers charge an Annualized Percent Rate (APR) of approximately 30% to 45%. Compare this to typical personal loans that would cost less than 20%.

The second big problem is all the fees and penalties that the issuer will charge you. Lets face it, not all of us are disciplined about paying our bills promptly. There will be hefty late payment charges that could be around 5% of the amount outstanding. If we are overspending there will be overlimit charges. If we withdraw money from an ATM using our credit card, there will be transaction fees of around 2.5% of the withdrawal amount subject to a minimum fee of say 300, and additionally there will be finance charges on top of this. There are numerous other kinds of fees that will be mentioned in the terms and conditions, but you probably get the point that borrowing on your card can be expensive.

Finally, if you are not disciplined about paying your card bills on time, then it will affect your credit history. A person's credit history is their track record of paying their bills and monthly EMI or loan repayment commitments on time. If you have a recurring pattern of delaying your payments or if you start defaulting on your obligations, you will get a marked with a low credit rating. A low rating will make it that much tougher for you to borrow money later in your life.

The following are 5 tips for all credit cards users to help avoid problems:

1. Don't fall for aggressive marketing tactics: All cards are the same, some features might be different. Don't fall for some marketing ploy just because the annual fees are being waived. The truth is that you probably don't need more than 1-2 credit cards. Don't spend indiscriminately just because you are getting loyalty points. Buy stuff that you really need.
2. Pay all your dues on time: Don't delay payments and as far as possible, pay your entire outstanding amount on the due date. Otherwise, you will have to pay expensive fees.
3. Review your monthly statement: Don't just assume that your statement is correct. Card companies have a bad habit of making mistakes. Ensure that there are no hidden charges, and verify that you have indeed used your card for the various items listed on your statement. This way you can also avoid being a victim of credit card fraud.
4. Don't withdraw cash on your credit card: Use your card when you know that you can pay your dues back asap! Don't treat your credit card as a mechanism to borrow money from the ATM. Only use your savings in your bank account to withdraw cash.
5. Use your debit card more frequently: Spend money that you have, rather than money that you might not be able to pay back. Debit cards usually come with no cost to you and its unlikely that you will need to pay any finance charges that you will have to pay on your credit card in case of delayed payments.

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