Avoiding credit card debt
As we mentioned above, We recommend that if you get a credit card, you should plan to pay the full amount owed every month. That way you avoid the exorbitant interest rates the cards charge, and you also benefit from the grace period (which in effect enables you to borrow money for a few weeks for free).
In order to accomplish this, determine how much you're able to pay on your credit card bill each month and then stick to that limit. At the end of the month, pay the full amount, just as if it were any other bill, like rent or utilities. Also, examine each monthly statement to make sure there are no inaccuracies or fraudulent activity, and report anything you find immediately.
If you usually pay the balance in full but are going to be late with one payment, call the credit card company and find out how much you will be charged as a penalty. Include that amount in your check, so that the fee doesn't appear as a balance on the following bill, which would eliminate the grace period and result in more interest charges.
If you expect to have difficulty paying off the bill every month, consider using a debit card (which draws from your bank account) or an American Express card (which doesn't allow you to carry a balance from one month to the next). Remember that if you owe money on your credit cards, you're really borrowing from your future earnings, which is a bad habit to get into.
Escaping credit card debt
If you already have credit card debt, you're not alone. The average U.S. family has a credit card balance of about $8000, meaning they pay more than $1000 a year on just the interest. But this is an expensive cycle to get into, and these folks would benefit greatly by working their way out of this debt as soon as possible. Debt isn't always a bad thing, but it can become a problem if not handled property. It isn't the end of the world, but it is important to resolve the situation as quickly as possible because doing nothing will almost always lead to more problems. Watch for these warning signs:
- You often spend more than you earn.
- You often pay just the minimum required amount on your cards.
- You skip payments on some bills in order to pay others, or use cash advances on one card to pay another one off.
- You have reached the limit on ("maxed out") one or more of your cards.
- You dread opening your bills each month.
- Creditors are calling you about overdue bills.
- Your consumer debt exceeds 20% of your net income after taxes, or your total monthly payments on all debts exceeds 35% of your monthly gross income.
- You're considering filing for bankruptcy.
If you do feel that the debt you have might be a problem, here are a few tips for improving the situation:
- Determine how much debt you have, and put together a plan for repaying it. If you're currently paying the minimum amount required on your credit cards, stop doing so, and pay the maximum you're able to. If you pay the minimum, it will take you 20-40 years (!) to pay off the balance, meaning you'll pay more than five times the actual debt in interest.
- If you have multiple cards, pay off the ones with the highest interest rates first.
- Consider switching to a card that offers a lower interest rate.
- If you're a homeowner, consider a home equity loan. The rate will usually be significantly lower than that of a credit card, and the interest on these loans is generally tax deductible.
- Avoid luxuries, impulse buying, and any unnecessary spending.
- Keep track of your expenses so you can determine where your money is going and keep a tight lid on expenditures that are higher than they need to be.
- Limit your credit card usage to the bare necessities, and cancel most of your cards, just keeping one or two. If the situation is dire, try to stop using your credit cards entirely.
- Don't expect a quick fix. Fighting your way out of debt takes time and perseverance. You should do it as quickly as you can, but understand that you're fighting an uphill battle that might take some time.
- Consider getting assistance. The Debt Counselors of America assist consumers with their financial problems. Call 1-800-680-3328 to request information or visit their Website. The Consumer Credit Counseling Service, which is listed in your local Yellow Pages, can also assist consumers with their financial problems. For a small fee, you can get help negotiating a payment plan that will keep your creditors at bay. (but beware that although they're non-profit, they're funded by credit card companies, who want you to avoid bankruptcy)
- Consider debt consolidation. It's possible to consolidate your debt into a single payment, to simplify the process and sometimes to save money. But be careful, as there are some expensive (or even unscrupulous) debt consolidation services that can end up costing you money rather than saving you money.
- Once you've paid off the debt, start to build a cash cushion to protect you in the event that unforeseen circumstances require money. That way, you won't have to run up debt again to deal with them.
- Take steps to improve your credit rating.