23 Jan What You Need to Know About Credit Card Debt
Pros of Using Credit Cards
Credit cards can be a good thing. They can help with purchasing large-ticket items that you or your family might need immediately. Credit cards can be used to build revolving credit. A well-maintained credit card account really can help build your credit rating – that isn’t just hyperbole from the credit card companies – although it is often a selling point they use to persuade people to take out new cards. Credit cards can even be helpful in emergency situations, such as vehicle or home repairs. When traveling, they can offer a layer of protection against theft – theft of cash, even to some degree, against identity theft.
Credit cards, however, require vigilance and a certain degree of personal discipline.
Cons of Using Credit Cards
The problem with credit cards is that sometimes they are the easy way out. They can be the means to take a vacation that you really can’t afford, the answer to added groceries for guests, or even the way to afford that electronic whizzbang that is the latest fad. They can be used to shore up a sagging budget that is suffering from overload or that has been impacted by injudicious spending.
This might seem to be harmless. But the result will be that in a few short weeks, payments will need to be made on the credit cards. If your budget is already suffering, this can only add to the difficulty of making ends meet. Now, not only do you owe the original bills, now you have a new one to pay, as well.
A good rule of thumb for credit cards is to never use them for quick-use items unless it is an absolute emergency. The baby formula might be a good example of such an emergency, cookies and ice cream for a midnight snack is not. Buying consumable products with credit tends to create a credit revolving door that keeps you trapped in a cycle of buying on credit, paying the purchase price plus interest, and then having to buy on credit again. Thus, a gallon of milk, purchased for 2.99, might soon cost 6.99, then 16.99…and so on. The interest could keep accruing long after the milk has been consumed and forgotten.
Irresponsible Spending or Impulses Buying Isn’t Always the Problem
Emergencies happen. In fact, having a credit card can take the initial sting out of an emergency, whether it is an unexpected plumbing bill or the need to buy an expensive medical prescription. Life events sometimes prompt spending, as well. Children only graduate from high school once, they only require prom finery once or twice. Business opportunities can crop up that can only be realized if acted upon immediately. Some things must be dealt with in a timely fashion or the opportunity is lost forever.
Enrollment in higher education classes and purchasing books is a prime example of opportunity that will pass by if not acted upon quickly. Grants and student loans rarely cover all college expenses, and there are almost always small incidentals required by instructors. These should not be confused with purchasing the latest sound machine or niftiest computer – even though sound equipment or a good computer might be needed for some classes.
Promises from Credit Card Companies
There has been an ad on YouTube recently that shows a young woman who is exceptionally happy about being contacted by her credit card company. They have matched funds with her, and now she has a bonus amount awarded to her card. Credit card companies frequently offer advantageous plans to coax reluctant consumers to sign up for their cards. These might range from a free travel mug to points that can be used for purchases, or to 0% APR for the first year. You can bet that the company plans to make money on your account, no matter what sort of freebie they are handing out. That is why they are in business, after all.
That is not to say that some of the deals aren’t good, or that you won’t enjoy that travel mug, or that you can’t put that 0% APR to good use, but the odds are weighted in the credit card company’s favor – every time.
Knowing When You Have a Credit Card Problem
Knowing when you have a credit card problem sounds sort of like those horrible jokes that start out, “You might be a ___________, if ____________.” But the punchline for this joke isn’t very funny. It runs more like this: You might have a credit card problem if you must rotate the card that is getting paid this month. You might have a credit card problem if your total monthly payments exceed the amount of your monthly income. You might have a credit card problem if you are afraid to answer the phone, collect your mail, or answer the door for fear of debt collectors.
Other symptoms include having maxed out most of your cards, your credit card payments have reached an amount that forces you to use the cards to purchase necessities such as groceries, you and your significant other constantly argue about money, and you are afraid to add up the bills to see how much you really owe. You might be thinking about taking out bankruptcy just to relieve the load of debt. Your quality of life has been impacted by worry about the credit card debt that you owe.
What Not to Do About Credit Card Debt
Don’t Ignore It – The debts you have run up will not go away just because you fail to answer the phone calls, the letters, or the knock on your door. Furthermore, the longer the amounts remain unpaid, the more interest will pile up. If you ignore the cards too long, the interest on them will eventually be more than the original charge amount.
Don’t Give Up – Don’t give into feelings of despair. When people are pestering you daily to pay your bills, it is easy to feel miserable, and even to give into extreme feelings. While being deeply in debt is scary, there are answers and there are people who can and are willing to help.
Don’t Take Out Bankruptcy – While your credit card debt might be wiped out, along with several other types of debt such as medical bills, or veterinary bills over $500, personal loans and cell phone loans, it will not wipe out all types of debt. Secured loans, such as a mortgage on your home or vehicle are handled differently from unsecured loans. You cannot take bankruptcy to eliminate student loans. Nor will bankruptcy discharge checks that were written for insufficient funds, car repair bills or insurance policies. A Chapter 7 bankruptcy will severely impact your ability to get a mortgage, buy a car, or take out new credit if you should need it. It might even have a negative effect on your ability to have utilities turned on or to rent an apartment.
Don’t Close Your Cards – Closing your cards could create an imbalance in your debt to credit ratio. For example, if you have a card with a $10,000 limit and you only owe $2000 on it, your credit utilization is only 20%. But if you close the account, your total credit would drop, and your debt to credit ration would rise. This would seriously impact your ability to get new credit should you need it for an emergency. Debt to credit and debt to income are two factors used in figuring your credit score. Furthermore, part of your credit score is figured on how long you’ve had a credit account. If you’ve had the account for ten years or more, that is considered a very good sign. But if you close that account, you lose all that time.
Ways to Cope When You Can’t Pay
Even if you are exceptionally responsible about paying your credit cards and other bills, life events can sometimes cause interruptions in your ability to make good on obligations. When these things happen, contact your creditors as soon as possible, and let them know your circumstance. Explain what you are doing to take care of the problem. If you have been ill, for example, and your next paycheck will be short, be prepared to give a date when you might be able to make a payment. If you have lost your job, let them know what steps you are taking to meet your financial obligations – such as applying for unemployment insurance, looking for a job, or appealing to a friend or family member for assistance. Contact might not forestall the phone calls, letter and emails, but it does show effort.
Making a payment that is less than the minimum amount will not clear your obligation, and will not stop collection efforts. You need to make those amendments to your situation as soon as you possibly can.
Two Good Methods for Paying Down Debt
The Snowball Method
As you probably know, you can roll a little snowball from the top of a hill and by the time it gets to the bottom, it will be a big snowball. This method of debt repayment focuses on paying your smallest bills off first while continuing to make the minimum payments on the other bills. Once the first little bill is paid off, that money can be applied to the next biggest bill. As each bill is paid off, the number of bills among which you must divide your money is reduced and the bills are paid off faster and faster – just like a snowball rolling downhill.
The Stacking Method
The stacking method works by sorting your bills by interest rate, and paying off the ones with the highest rate before the ones with lower rates. This might mean paying off that payday loan – which might be relatively small, but which has a high-interest rate – quickly so that the interest on it does not compound the problem, in every sense of the word. Paying off the bills with the highest interest rate can have a snowball effect, but it can also be very slow, depending upon the size of the high-interest debt. Keep in mind that you should still be paying the minimum balance on everything while you are putting extra money on the loan with the high interest.
Finding Money to Pay Off Debts
Finding the money to pay off your debts can be difficult – especially if you used the card to take care of an emergency that has the effect of diminishing your income even temporarily. Some ways to do it are to look through your normal spending to see if you can find ways to reduce your usual budget. You might also take on a second job, or explore alternative income methods, such as working online. These avenues can be tough, especially if you are dealing with an emergency.
You Don’t Have to Go It Alone
Dealing with debt can be discouraging. Not all creditors are understanding; and they are even less understanding if the situation that goes on month after month. If you have dug yourself into or fallen into such a deep hole of debt that you are afraid you will be there forever, it is time to call the professionals.
There is an old saying that a burden shared is a burden made lighter by more than half. We can do more than just listen and share the burden. National Debt Relief can help you make a positive, sustainable plan that will allow you to steadily chip away at the amount that you owe. We can’t just magically make your obligations go away, but we can support your effort and even smooth the path. We have the knowledge to direct you toward your best options. In most cases, we can come up with a workable plan that will allow you to pay off your debt in twelve to twenty-four months. We won’t mince words about it. Those could be some difficult months, but the relief when that mountain of debt rolls away will be well worth it.