Should I take out another credit card? 6 questions to ask before taking on extra debt

Should I take out a credit card?

How do you decide whether taking on extra debt is right for you?

Since the recent increase in the bank of England interest rate it’s likely that the costs of loans, credit cards and mortgages will start to gradually increase. It makes now a great time to assess your spending habits and level of debt.

If you are asking the question about whether more debt is right for you, then you are already at a great starting point. You are thinking sensibly about your finances- keep doing that!

To help you out a even more here are 6 questions to ask when you are considering taking on additional debt. They are focused on a credit card but relevant to all sorts of debt.

1. Do I need to make the purchase?

The key first question. Do I need to buy this holiday/car/technology? We need to get better at learning the difference between “wants” and “needs” in order to avoid unnecessary debt. Is it an emergency? If so, saving up and using an emergency fund would generally be a better way to go.

2. Can I save up instead?

If you are taking on finance to purchase something, and will be paying it back over several years- why not get a head start by saving before you take out the debt? How long would it take you to save up? If I can’t trust myself to save up, should I really be taking out the debt in the first place? I used to use credit cards to pay for my car insurance, before paying it off over the coming year. It’s better to save up beforehand, and not have the extra debt hanging around. Even if you pay for part of it, the length of time it will take you to clear the debt will likely be much lower.

3. How much would the alternative save me?

What are my other options? Buying a car- how much to use public transport or taxis? What is the saving? Is it worth the extra time? Going abroad on holiday- how much is a more local alternative? Self-catering? Is the cost saving worth it? There is almost always an alternative- make sure you’ve considered all the options before taking on debt.

4. How am I currently doing financially?

Am I just using this credit card to fund a lifestyle which is not sustainable? Is it a more ongoing issue? Do I keep needing a credit card just to help out a bit this month? If so then there could be bigger questions that need asking. How’s my monthly budget looking? Do I need to consider some lifestyle changes? There is also a risk that your credit rating isn’t strong enough to get another credit card.

5. How good is the credit card?

What is the interest rate on the card like? Are there other rewards or bonuses? How long is the interest free period? Make sure that you are getting the best deal that you can on the debt that you get. This will save you a lot of money over the long term. There's also 

6. What is my plan to pay it off?

How much will the monthly repayments be? How much extra do I have in my budget? How long will it take to pay it off? Make a plan to clear the debt by a certain point, ideally quicker than you have to. There’s nothing worse than needing to take on more debt to clear the debt you already have!

Considering the answers to these questions will help you to make a more informed decision about whether taking out extra debt is right for you.

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