Maintaining a healthy relationship with credit can be key in securing your monthly cash flow and managing unforeseen emergencies. However, not all debts are made equal – and ‘debt traps’, as they’re often called, are situations where debt can be extremely difficult or impossible to escape from.
Stores often promote their own accounts and card services with promotions and special deals, and owning a store card often means that you can walk out of a shop with goods in hand and without having to pay for anything up-front.
While this can feel like an appealing option – especially for back-to-school and festive purchases where money might be tight – store accounts can charge interest and management fees that can quickly add up if the debt goes unpaid.
A good practice is to only use store accounts in emergencies (such as buying school shoes) and pay off these accounts as soon as possible. If you owe money on a store account, prioritise paying this expense as you will reduce the amount of interest you pay. Try to live by the simple principle – if items are a want (and not a need) and you can’t afford to pay cash, don’t pay at all!
If you’re looking to save towards a particular item, consider reading our easy money saving tips.
Hire purchase is one of the most popular ways to buy expensive items such as furniture or appliances.
While appliances can be a need, hire purchase arrangements usually involve a higher interest rate and, what’s more, can see the item is question used as a security. That means that should you fail to make a repayment, the item can be repossessed by the lender or store, while your repayments can continue!
If possible, try to avoid hire purchase agreements and purchase items with cash. This will save you money on interest and fees. If you need to enter into a hire purchase contract to buy a new washing machine for example, ensure that you are able to easily afford the minimum repayments and check the credit agreement fine print in detail.
Keeping up with the Joneses
One of the most common debt traps is that we all want to ‘keep up with the Joneses’ – that is, maintain a lifestyle that is similar (if not better) than that of our close friends, colleagues, and neighbours.
Ultimately, however, everyone’s lifestyle is different - and each person has different financial priorities and concerns – meaning that trying to compete with someone else is often a quick road to blowing your budget.
Remember that your ultimate goal in achieving financial independence is to fund a lifestyle that gives priority to your needs rather than your wants.
If you’re able to plan ahead and budget within your means, you can save money towards goals that are truly valuable to you.
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