Credit cards have proven to be very useful in everyday life. Whether at the grocery store, filling up the gas tank, or shopping online, credit cards are accepted, and in some cases the preferred method of payment. Credit cards have become a part of our financial culture. Because they have become such a large part of everyday consumer spending, they are now one of the easiest forms of credit to obtain. There are credit cards for any number of financial situations, so that no matter who you are, there is a card tailor made for you!
If rich, there are cards with all sorts of exotic perks. Conversely, if you’re going through a difficult time financially, there are credit cards for people with poor credit history. There are credit cards for college students, who typically don’t have much or any credit history at all. Credit cards are arguably the most accessible form of credit available today, and the easiest form of credit to get you in trouble.
Having to deal with excessive amounts of unsecured credit card debt is an all too common problem in today’s world. All it can take is one missed payment, one decrease in your credit limits, or one unexpected expense that pushes you over the edge. Before you are even aware, your interest rates are all in the mid 20’s and your minimum payments have doubled. When this happens, it’s time to evaluate your financial situation and determine whether you need professional help, or whether this is a situation you can handle on your own. What are your options?
The most common forms of assistance are; [1] consolidation; [2] consumer credit counseling; [3] debt settlement; and [4] bankruptcy. Deciding which one is the optimal choice for your particular situation can be a daunting task. The option best for you will depend on the severity of your situation. Debt settlement maybe your best option if you are falling behind on your payments. Consolidation maybe one of your best choices if you can qualify for a personal loan, consolidate under a lower interest rate, and therefore pay off the debt sooner. Consumer Credit Counseling maybe your best choice if you are not in too deep but can’t qualify for a personal loan, and when all else fails...bankruptcy is your sole option. That is not to say that bankruptcy can’t be very helpful. It can be! Sometimes it is not just the only option; it can also be the smartest one.
When you reach an uncomfortable stage with your credit card debt, there is one step that cannot be overlooked. It may be the most important step there is when analyzing your situation. Very simply…STOP USING YOUR CARDS! By the way, if you find yourself constantly using a credit card to pay for essentials, you may be on a slippery slope. As a general rule of thumb, if you can’t pay cash for it don’t buy it! Ending the cycle is the first step.
Debt is part of a cycle (for some people a never-ending cycle). If you don’t stop it, the cycle will continue. The second step (after you stop using your cards) is to make higher…yes higher payments! Unfortunately, many credit card companies set up there “minimum” payments to keep you in debt, not to help you pay down your debt. This is a bit of an over simplification, but consider the following example:
Your credit card balance is $5,000 and your interest is 15%. Interest is usually charged “per annum”; in other words, on an annual basis. So with this card, your total annual interest payment is $750. Doesn’t sound too bad right? Watch this. Divide that $750 over 12 months and you come up with a monthly interest payment of $62.50. Credit card companies usually set up your minimums so that they are around 2% of your balance (until you fall behind, or your credit limits go out-of-line with their standards). Assuming a 2% minimum, your monthly payments would be $100; $62.50 would go to interest and the remaining $37.50 would go to paying down your balance. Assuming the preceding example continued without interruption; it would take a little over 133 months (around 11 years) to pay off the balance. The total cost to you over that period of time would be around $13,300.
The bottom line here is…DON’T ONLY PAY YOUR MINIMUMS!!! PAY MORE!!! Remember that making more than the minimum is only recommended once your debt reaches too high of a level. Making minimum payments is not only fine, it’s recommended if you are not in over your head. If you are someone who likes to build up his/her savings, but at the same time has lots of credit card debt, you are most likely being counterproductive. You should be paying down your debt before you begin to save, speaking in generalities. Reason being is that your interest rate on your cards is most likely much higher than the rate of return on your money in your savings account. If you credit card is charging you a 15% interest rate, and your savings account get 2% a year, your losing money! When paying down or off your credit card debt, remember that not all your credit cards are created equal. Prioritize them.
Organize your cards. If you can’t afford to make more than the minimums on all your cards, then you need to decide which one to pay down first. As a general rule, pay off the one with the highest interest rate first, then the second highest, so on and so forth. The card with the highest interest rate is costing you the most money, once again, as a general rule. While prioritizing your cards, remember to keep an eye on your minimum payments as well (remember the above example). If you have two cards and they both have the same interest rate and the same balance, one company may have your minimums set up at 3% of your balance, while the other may have your minimum set up at 2% of your balance. In this case you want to make extra payments on the card with the smaller minimum payment.
Finally, you want to minimize your expenses and increase your income. If you have time for a second job and can find one…take it! Use your income from your other job to pay for everything else and utilize the income from your second job to assist in paying down the cards. Once again, increase income and decrease expenses wherever and whenever possible when dealing with excessive amounts of unsecured credit card debt.