2019.09.04

How to Avoid Personal Credit Risk

If we consider the fact that an average person aged 18 to 35 in Hong Kong spends more than 46% each month on credit purchases, it is safe to assume that many people today struggle to stay afloat and balance the books, without going in the red. 

However, getting in debt is not as easy to avoid as it may seem, so taking the time and effort to manage your finances wisely will be more than beneficial in the long run.

There are several crucial steps to take to avoid falling into debt and facing serious financial troubles that could prove to be particularly difficult to overcome.

 

Set a budget

The first and foremost thing to do when it comes to successful financial planning is to set a budget and stick to it. To be able to meet the desired financial goals, a person needs to know how much money they are currently spending, how much they can actually spend, and what their priorities are. Start by calculating your income and your average monthly expenditure. It is essential to know exactly how much money to set aside for certain expenses you have every month, such as rent, mortgage, utilities, or food. The amount of money you have left can then be used for variable expenses, which can fluctuate from month to month. 

Failure to set a budget might lead to spending more money on non-essentials without setting enough money aside for the fixed expenses. This means using a credit card to cover the necessary expenses. Not having a budget set for the following month either will lead to the inability to pay credit card balance. As a consequence, the interest rate will increase and, in an attempt to stay afloat, you will start using your credit card more frequently and might soon find yourself deep in credit card debt.  

 

Avoid using a credit card whenever possible

Although a credit card comes with a seemingly long list of benefits, the disadvantages often outweigh the advantages, and the majority of people do not realize the hidden dangers this convenient way of purchase brings.

To begin with, many people use a credit card as a loan, which is a sure-fire way to get in a credit card debt. Credit cards enable their users to borrow more money than they can afford to give back. Each time you think of your credit card limit as ‘free money’ you can spend as you see fit without any repercussions, you fall into a debt trap. A credit limit is, in fact, a high-interest loan due to the high-interest rates you are required to pay every time you carry a balance. As long as a person continues borrowing money, there will be a credit card balance waiting to be paid off, and the debt will continue to mount, becoming more burdensome with each passing month.

What is more, for the majority of credit card holders, having a credit card means being able to overspend regularly and live beyond their means. In fact, people are more inclined to spend more money (up to 83% more) when they use their credit card, as opposed to when paying with cash. It is believed that the reason behind such behaviour is the tendency of credit card shoppers to focus more on the benefits of a certain product, instead of the costs, along with the fact that the payment is delayed until the credit card bill is due, which many see as a great convenience. This is one of the biggest financial pitfalls a person can fall in, as it quickly leads to overspending, carrying high balances, credit score decrease and, eventually, indebtedness. 

 

Use a prepaid card instead

As the fastest growing non-cash payment method in the last decade, prepaid cards such as UniCard’s Mastercard Prepaid Card have a number of benefits for their holders, including: 

 

  • No credit risks involved

Prepaid cards were originally intended for those with poor credit history and credit issues and, as such, are not connected to any bank accounts nor subject to any potential credit risk. The money is loaded onto the card prior to making any purchase or a transaction. This means that a person who uses a prepaid card can only spend the amount of money they decided to add to the card, thus making it impossible to exceed the credit limit, carry a balance and to fall into credit card debt.

 

  • Convenience

Since a prepaid card is not connected to a bank account, it is ideal for all of those looking to avoid dealing with a bank. Prepaid cards, such as UniCard’s Mastercard prepaid card, are accepted both worldwide and online, giving their holders quick access to their money no matter where they are or what they are looking to purchase. 

 

  • Ease-of-use

Prepaid cards function similarly to credit or debit cards, in a way they are perfectly easy to use. They are accepted mostly anywhere other cards would be - hotels, car rentals, shops, ATMs, restaurants, websites, etc. In addition, there are several very convenient ways of adding money on the balance, such as transferring it from a Paypal account or any kind of bank account, using a reload card, having an employer load payroll onto the card, or reload it at a retail store. 

 

  • Controlled spending

It is not always easy to keep track of your budget and monitor every purchase, especially when a person has to keep an eye on different cards, accounts, and cash flow. Using a prepaid card facilitates the whole process of spending management as the credit balance is always exclusively determined by the prepayment made for spending, thus limiting the costs and risks of overspending. Moreover, money set aside for certain expenses can always be separated from the main account and transferred straight to the prepaid card, making it easier to track every purchase accordingly.   

 

Bottom line

Avoiding personal credit risk is possible once a person realises the importance of following some basic principles. Setting a budget and adhering to it should be considered an imperative for steering clear from any type of financial difficulties. If possible, it is best to avoid the use of credit cards, or at least try to maintain a sense of discipline if they are inevitable. On the other hand, substituting them for a prepaid card is a great way to gain more control over your finances and, thus, avoid any unwanted credit risks. 

In case you decide to apply for a UniCard’s Mastercard Prepaid Card, find out all the necessary information on our website.




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