Credit Card debts: Causes and Prevention.

Facts on Credit Card

First, let us try to understand how this wonderful plastic card works. It provides you with a line of credit, which is the maximum you can charge to the card. As you make purchases, the available credit line decreases. When you receive your monthly statement, you have the flexibility to either pay off the whole amount, or pay only the minimum amount due (which is strongly not encouraged). When monthly payments are made to the card-issuing bank, the amount of credit line available is then restored. However, many consumers typically pay only the interest and a bare-minimum amount of principal and thus never fully repay the entire sum.

How do people find themselves caught in such circumstances? For many young people, running up debt begins innocently enough. Upon entering college, many of these college students are given that little plastic card, “subbed” from their parents’ credit cards. Oh, there are just so many things that they “need” to buy (for e.g. a new pair of branded shoes & clothes, i-Pods, a cool bag & matching accessories etc.) and just too many parties & clubbing sessions that they “need” to attend! Calling their folks for extra money every now and then is just too much hassle (and”waste’ of money for the cost of phone calls). It’s so much easier to just – Charge It!

With the implied promise of high-paying jobs in the near future, many students enter the credit world thinking their debt will disappear as quickly as it was acquired—in just a few years after graduation. Regrettably, most graduating students find reality to be much different from their naive expectations. Continuing to charge more than they can comfortably repay, many find themselves in a spending trap, in which rising debt matches or exceeds rising incomes. 

Young people, of course, are not the only ones caught in such financial circumstances. Many adults have likewise given in to the allure of easy credit. Advertisers tell us we "deserve" their new and improved products—and most of us willingly believe them. The desire to enjoy life to the fullest with the latest entertainment, clothes and gadgets can be irresistible. People can also be trapped into the vortex of credit card debt via unemployment. If one has no savings, adding debt to one's credit cards is often the quickest way to cover basic living expenses. However, then, when they do secure a new job, many find their credit cards at maximum limit, and repayment schedules become a severe burden.

Although most of us don't like to consider negative possibilities, we cannot avoid financial disasters by simply ignoring reality. Economic downturns inevitably push more people to the edge of financial disaster. Only those who have taken precautions or avoided precarious situations survive. What can you do to avoid becoming a sad statistic?

 

We live in a world where debt is not only acceptable, it is the norm. Almost everyone you meet has debt of some kind. So, in a society that views debt as a way of life, how can we control our debt instead of allowing it to control us?

 

Causes of credit card debt:

Interest

The interest is the money paid on a balance to a lender by the borrower, which is to be paid every month, if you roll over your balance from month to month. Interest does not usually go down on its own, and when only minimum payments are made, your balance can grow to un-manageable amounts. If you are late on a payment, your interest rates can increase to 35 percent, making it very hard to pay off balances. With interest rates still on the rise, there is no better time to take a good close look at your finances.

Payment

Debt, especially credit card debt can accumulate very fast and many people soon find themselves barely able to even make the minimum payments. Remember if you are late on only one payment, your rate could increase drastically. If you are not good at remembering payments, it is wise to set up direct debits to pay your credit card bills. It is always best to control your spending and try to pay more than the required minimum payment whenever possible.

The main problem with credit cards is that they make it very easy for you to spend money. The most important step take to reduce credit card debt is to not use your credit card for every little thing, use cash whenever possible.

Studies show credit card debt is higher for males than female debtors are, and even higher for joint accounts. The problem with carrying credit card debt is that the interest on the card will typically accrue much quicker when you only make minimum payments.

Prevention:

The first thing to do when considering your debt is to make a budget. It is important to have a plan for your money so that you will know exactly where all of your funds are going. Many people believe that a budget will be constricting and not allow them any freedom. Really the opposite is true. A budget allows you the freedom of having peace of mind knowing that all of your bills are paid and the money has been allocated ahead of time for these expenses.

Knowing where to start when making your budget can be overwhelming. The best place to begin is to make a list of all of your income. Once you have listed your income, make a list of all of your bills. Be sure to include things like cable, internet, cell phone, electricity, water, credit cards, loan payments, and any others that you might have on a monthly basis. Things like trash that are normally billed on a quarterly basis should also be included by dividing the normal bill by 3 to get the monthly total. Once you have listed all of your bills, consider living expenses. Things like gas, groceries, laundry, personal care, entertainment, and spending money should all be budgeted into your plan.

It is also important to have a savings plan. This is key to help you prevent yourself from getting into debt. Set aside a certain amount each month into a savings account. It can just be for general savings, or you could set a goal to save up for a big purchase. Saving with a goal in mind motivates many people to stick to their savings plan. They know that at the end they will be able to purchase the desired object without going into debt.

If you already have debt, it can be advantageous to take some steps to help manage it. If you have a high amount of credit card debt, it can be wise to consolidate it into one loan. If you are a homeowner, using the equity you have accumulated in your home is often the wisest way to restructure your debt load. You can roll all of your debt into one loan and make one payment that has tax advantages. It is wise to talk to your financial institution about all of the options they have for you.

Another way to manage existing debt is to consolidate your debt into one payment using an unsecured loan. Although the rates will be higher than a secured loan, often it will be lower than your credit card rates and the payment will be lower as well. This will allow you to pay off your debt in a specified time while paying less interest over the long run.

There are many practical ways to manage the debt you already have while preventing yourself from getting in any deeper. Make a logical, practical budget and consolidate your existing debt in order.