Sunday, February 15, 2009
What is credit card debt?
Credit card debt is an example of unsecured consumer debt, accessed through ISO 7810 plastic credit cards. Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent. The results of not paying this debt on time are that the company will charge a late payment penalty and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default". The late payment penalty itself increases the amount of debt the consumer has. When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.
Causes of credit card debts (10)
1)Less Income, More Expenses
It so happens that the main breadwinner of the household loses his job but monthly expenses are not cut down in line with the reduction in income. This obviously leads to a rise in debt. The family is forced to use their credit cards for groceries, utilities, etc.
2) Saving little or not at all
You should save for at least 4-6 months of living expenses in case an unfortunate tragedy happens. For example, if you lose your job on June 1st, you shall have enough money to maintain your current lifestyle till December 1st of that year. Until December 1st, you can find yourself new employment or open your own business. You will often hear the phrase "Pay Yourself First." Having enough savings for a rainy day is always a worthwhile investment. Do it and you shall be better off!
3) Divorce
Fees for the divorce attorney, division of assets between you and your spouse, proceeds given to children, etc are an easy way to rack up a huge debt. Filing for a divorce may force you to quit working for sometime which leads to reduction in income.
4) Poor Money Management
Poor money management is one of the best reasons why so many families accumulate lots of debt. Not having a monthly spending plan and not keeping track of your monthly bills makes you unaware of where your money is going. You might be spending hundreds of dollars every month towards items that are useless and have no value in your life, yet you do not realize it.
While your money is going towards purchasing useless items, you might also be charging your necessary purchases on your credit card, forcing you to pay interest on these purchases every month.
5) Hoping to win the lottery
Most people hope to win the lottery but the chances of that happening are 0%. Do not spend tomorrow's saved money today just because you expect a promotion in your job or are expecting an inheritance from a deceased grandfather. We all know life is unfair and things can go wrong more easily than going right.
6) Underemployment
If you are underemployed meaning you are not getting enough working hours at your job, you should also cut down on your lifestyle to match your current income. Forget about driving a BMW if you are working only 30 hours a week at the Home Depot making minimum wage.
7) Big medical expenses
While you need treatment now, you do not have the cash. So what do you do? You use your credit card because you do not have enough savings in the bank. In the end, it became a burden if you cannot pay off the bill that increases every month.
8) Financial Ignorance
Important topics such as saving and investing your personal finances are not taught in school. It's on you to learn to save for a rainy day, as well as manage your money so you can own a house over the longer term.
9) Non Financial Communication
Communicate your current financial health with your spouse and your children and make them aware that if you cannot afford a certain item, they should not ask for it. For example, if your 18 year old son wants a new nice hot sports car, communicate to him that you cannot afford it. Instead, he should go for a smaller car that gets him from Point A to B. You and your spouse should promise to each other that you will not hide your spending habits. One of the most common reasons why so many couples undergo divorce is because they rack up huge credit card debts without the other spouse's knowledge. This then leads to divorce which can help in racking up even more debt
Many people put not only their own disposable income on the line when gambling, they also borrow loans to gamble! You see, Casinos would not exist if every one person won money in it. Probably 1 in every 100 people wins money in the casino over the long term. Another huge boom in the gambling industry is the emergence of Party Poker and online gambling websites that are illegal in the
The minimum payments required by credit card companies have steadily fallen over the years. Where once it was typical to have to repay a minimum of 5% of your balance every month, it's now common to only have to pay 2.5% or 3%. With repayments this small in proportion to your debt, a large chunk of each payment gets swallowed up in interest charges. Depending on the APR rate of your card, up to 75% of each payment could be 'lost' in this way, meaning that it takes a very long time for your balance to reduce to any great extent.
By trying to repay more than the minimum, even if only by a little, you can speed this process up, and in the long term you'll end up paying much less in interest charges.
2)Prioritize your card debts
If you have more than one card with different rates of interest, it makes sense concentrate on the one with the highest interest charges. This means not just the one with the highest interest rate, but the one which actually charges you most each month, which could have a lower rate but a higher balance.
Check your statements to see which card is costing you most in interest each month, and try to focus on repaying this card first by putting any spare cash you have into extra payments while keeping to the minimums on your other cards.
3)Change your card
The credit card market is very competitive, and rates have fallen over the last few years. You may be stuck with an old card charging an old rate that is much higher than newer cards. If you can get a new card with a lower rate and transfer your account balance on to it, you could save a lot in interest charges, helping you to bring down your debt. If you can get a card with an introductory rate on balance transfers then all the better - you'll get a few months of interest free credit which you can use to really drive down your balance as 100% of each repayment will be helping to clear your debt.
4)Debt consolidation
If getting a cheaper card isn't an option or isn't something you feel happy about, then maybe a consolidation loan would be worth considering. If you take out a loan and use the money to pay off all your card debts, you could benefit from a lower rate as loans are normally quite a bit cheaper than credit cards.
The downside to these loans is that the repayment period might be quite long, and so even though your monthly repayments will hopefully be lower, you'll stay in debt for longer and so end up paying more in interest. Done carefully, however, consolidation can be a sound move if there's little chance of clearing your debt in any other way.
5)Watch your spending
All the above strategies for getting your debt under control will only work if you stop getting deeper into debt - and this means stopping spending on your cards. Ideally, you'd cut them up so that you can't use them again, but this might not be realistic as you may need to keep them as a credit option in an emergency. In any case, cutting your spending to an absolute minimum will keeping your repayments as high as possible is the only sure strategy to clearing your debt in the long term.
References:
The Top 10 Causes of debt - debt consolidation
Get in Control of Your credit card debt - unarchived articles
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