13 Nov Managing Credit Card Debt
How People Get into Debt with Credit Cards
People apply for and receive credit cards for a variety of reasons.
- Your favorite store offers discounts or low interests rates if you use their credit card for your purchases.
- You or a family member needs something, and you can put it on your credit card and not affect your immediate budget.
- You want to build your credit rating.
You go on a trip – credit cards are generally more secure than carrying cash, travelers’ checks, or even a bank card because they have credit limits and a quick phone card can cancel the account, leaving a thief with nothing more than a piece of plastic.
The Trouble with Credit Cards
The trouble with credit cards is that using them correctly requires minding your budget and using some self-control. It’s very easy to say to yourself, “I’ll just put this on my credit card – I really need it now.” Or, “This is such a good bargain, I’ll save a lot of money (or time) by getting this item right now.
Credit cards can be a good resource for building your credit rating, for taking on trips, or for emergency purchases. But they can also be a trap.
Not all credit cards work the same way. Some require that the balance be paid in full at the end of each month. Others only require that the minimum payment be made. The first type can creep up on you during the month, and suddenly you discover that more than half your paycheck is going to the credit card. This forces you to continue using the card because you have no other currency to use to buy the things you need. The minimum monthly balance sort of card can also sneak up on you. When you carry a balance over into the next month, you will find yourself paying interest on the money you have used. Slowly, your debt might grow in amount simply from the accumulated interest.
When Your Debt is Too Big to Pay
On the day when you realize that you owe too much money to be able to make all the payments in a timely fashion, let alone pay anything off, your credit card debt needs amendment. The amount that you owe, and whether you have faced your habits squarely before they get too far out of hand, will determine your possible solutions. Rest assured, however, there are solutions. You are not the first person to be gently led to large amounts of credit card debt.
Benefits and Pitfalls of Credit Card Consolidation
One solution is to take out a new credit card that has a grace period where you will have 0% interest for a year or more. Transfer the balances from all your other credit cards to this new card (Read the fine print on your cards carefully. Sometimes there are fees or penalties for doing this.). Now you have one credit card payment to make instead of several.
Creditors Love It When You Do This
Your creditors are betting on human nature when they let you transfer those balances. With your cards all cleared off, your credit rating will improve. They can offer you new lines of credit that are greater than the old ones.Do not take them up on it!After taking out a new credit card and transferring all the old balances to it, you will still owe all the money that you owed before. If you continue to use your old cards, you will soon find yourself in a position where you not only owe all the old debt you had, you have new debt that is being added onto the old debt. If you keep those cards, lock them in a safe, put them in a bank vault or leave them with the stingiest elderly relative you have – one that will hide them and forget where they are. Until your debt is repaid, do not use them.
Benefits and Pitfalls of Unsecured Loans
Another way to take care of your credit card debt is by taking out an unsecured loan. Be very careful here, and keep a close eye on the interest rate on the loan. You do not want to pay more interest on the consolidated credit line than you would if paying the cards individually. Unsecured loans, where the money is used to pay off credit card debt, have many of the same hazards as transferring balances to a single, large credit card.
The benefits are that you are breaking away from credit card debt, your old debt is all paid off – except for the loan. But if you use those cards before the loan is repaid, you are landing right back into the same bad situation you were in before – only perhaps a little bit worse. This is especially true if you’ve transferred balances, and run up your cards again and now need the loan to pay it all off.
Benefits and Pitfalls of a Secured Loan – Title Loans, Home Equity Loans
Sometimes you owe too much, or you have been late on a few too many payments to get an unsecured loan. When this occurs, you have to offer collateral. Collateral is tangible property that the loan company or the bank can repossess if you don’t pay off your loan. Common types of collateral include personal vehicles or real estate. Every problem listed previously – continuing to use the cards, not living within your budget – are still with you. Only now, instead of just having an ever-growing pile of debt, you can lose your transportation or your home. If that isn’t a scary thought to you, then it should be.
Benefits and Pitfalls of Debt Management Professionals
When your debt reaches such monumental proportions that it will take more than a year’s pay to even reduce it, let alone pay it off, then you need help. Debt management professionals make it their goal to help you get your finances straightened out and your life turned around.
How They Can Help
These professional counselors will contact your creditors. They will help you make appropriate arrangements for payment, and they will help you devise a budget that will keep food on your table and a roof over your head while getting those debts paid.
The Hazards of Employing the Professionals
Debt counseling is not free. You can expect to pay fees to the debt counseling company in addition to the money you owe already. That is only fair, they should be paid for their services.
Make sure they are a legitimate company.Check the credentials of your debt counseling service. Look at their record with Better Business Bureau and with your local chamber of commerce. While a good debt counselor can help, there are charlatans out there parading under the guise of assistance.
Debt Counselors will assume control of your accounts. This is both good news and bad news. The good news is that you can refer your creditors to them. This can put an end to the letters, phone calls, and other annoying communications. The bad news is that you will have an allowance from your income on which to live. If you have unusual expenses or an emergency, you might very well find that yourself without the means to cover it. A good debt counselor will help you with maintaining a reserve for the unexpected, but they are not miracle workers. They cannot take a loaf of bread and a basket of fish and feed a multitude.
Summing It All Up:
Credit cards can be a good thing, but they can get out of hand. There are, however, solutions to paying off that credit card debt. Some will even preserve your credit rating. If you are unable to handle using DIY solutions, such as a consolidating card or a loan, then a properly vetted debt counseling company can help you climb back out of your financial slump. Don’t despair, help is at hand.