My take on credit card debt

The biggest suggestion I have is to avoid credit cards. Interest rates are very high on credit cards. Sometimes they are 18 percent. Sometimes they are 20 percent. If I borrowed money at 18 or 20 percent, I’d be broke…. So if I had one piece of advice for young people generally it would be to just avoid credit cards.” Warren Buffett

I am one of those people who have blundered quite a few times when it comes to credit card use, to the point that I have a big credit card debt that might take me a few years to repay now. Credit cards are extremely user friendly with everything about them designed to get you to spend more and more, that’s why you have to be very careful and disciplined if you decide to take on the responsibility of a credit card.

I am sure that there are people out there who are quite responsible when it comes to using credit cards but I believe that these are mostly people who are already in a strong financial situation or have tremendous discipline. I started out with credit cards when I was in an uncertain financial situation – first when I was a student, then when I was in temporary employment uncertain about my financial future. I spent more than I could afford at that time – believing  (or hoping) that I would soon be earning allot of money, this optimistic future that I envisioned never materialised and I am sure that if it had, I would just have upgraded my lifestyle and borrowed more.

My advice on credit cards now would be:

1. Never use debt to finance lifestyle or consumption spending as you must live within your means if you are ever to achieve financial freedom. I am not against debt at all but only for investments or for practical assets like cars, house remodelling etc. Credit cards however are usually used for consumption spending, therefore always ensure that you are able to pay off whatever you are using comfortably within the grace period.

2. Credit cards are for very wealthy people and not people like me.  As a rough rule your maximum credit limit should be about 10% of your annual income – anymore than this could put you in future credit card problems. 10% of your annual income is something you can clear in a few months as opposed to years. So if you do have a credit card – set your own credit card limit that’s 10% of your annual income, you can even call the credit card company and request them to reduce the limit.

3. Avoid using the card for small purchases because these are very difficult to keep track of and before you know it your credit card can blow out more than you imagined. So maybe set a high limit of 10,000 shs for example, that way you will have few transactions that you can easily keep track off. Anything less than that, pay with cash or debit card, that will avoid you getting a shock at the end of the month.

4. Start saving an emergency fund as this is the best way to meet unexpected expenses or to cover cash shortfalls. This will prevent you falling back on your credit card whenever you run out of money

5. Always pay of your credit card balance in full every month, this way you are living within your means and you also avoid any extra charges

I have not touched my credit card this whole year and I plan to start tackling this mountain of debt that I have accumulated very soon. So how can one eliminate their credit card debt? There are a few things one can do when faced with mounting debt and these are the steps that one can take.

  1. The first step should be to completely stop using your card. This will prevent you from accruing more debt and as you pay it off, it will continue to get smaller and smaller
  2. Always pay more than the minimum payment. Paying only the minimum amount will extend the amount of time it takes to clear a debt and the resulting interest accrued will be very high

If used wisely and responsibly, a credit card can be useful and convenient. However, because it is also very easy to abuse, the safest option is to just not have a credit card at all. If you do choose to get a credit card, make sure that you are either rich or in full time employment and that you feel secure about your ability to have that steady pay check.

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