Eight Things Consumers Should know about credit card debt

Post by Sharat on May 15, 2009 · Under Featured Articles, Hints and Tips, Personal Finance, Self Help, banking, credit cards, interest rates, loans, personal loans · Comment

Having a credit card doesn’t automatically mean that the holder must get into debt which can later become unmanageable and overwhelming. Many people, in fact millions of people charge purchases to their credit cards, and never pay a single cent in interest. Here are 8 credit card tips.

1. Owing Money Is Not Inevitable

It is completely possible for an individual to use their credit card regularly yet avoid being in debt. The secret to being able to do this, is charging only what one can afford to pay when the bill finally arrives. Credit cards when used simply as a payment mechanism rather than a funding source ensures that the individual can manage to stay out of debt.

To be able to do this the consumer should be acutely aware of their cash flow situation, tracking whatever charges they do make and ticking it off against income, and they must maintain the monitoring of income and expenses on a continuous basis. People who do not maintain knowledge of their cash flow situation, and use credit cards will most likely end up in debt to the card issuer.

2. Know When Short Term Debt Makes Sense.

Financing a purchase through debt can sometimes make sense, and therefore the use of a credit card can be a wise and useful option. The key is the repayment period, which should be as short as possible. If the consumer can make the repayment as quickly as over a couple of months, then they may pay no interest whatsoever if they stay within the interest free period, sometimes as long as 60 days, or whatever interest they do pay, is numerically small, even if the APR is high.

3. Owing Is Easy, Repayment is hard.

Individuals who do not pay close attention to their spending habits on their credit cards can easily sink into overwhelming debt. Typically consumer start of spending small amounts or borrowing only a little from their credit cards because their credit limits are low. As time progresses the card issuer increases the limit and the amounts borrowed end up increasing as well. Paying down debt is difficult because as the balance climbs, the interest compounds, and payments increase. With funds promised to past spending, less money is available for current and future expenses.

4. Debt Affects Credit Scores.

Remaining free from debt is not only advisable from a financial perspective, but holding on to high balances on credit cards, negatively impacts the borrower’s credit score. In order to score well, consumers should endeavor to hold under 35 per cent of their available credit limit. For example if an individual has a $1000 credit limit, in order to maintain a high credit score, they should not carry more than $350 in debt at any point of time.

Making repayments on time is also critical, falling behind or skipping payments will mean creditors reporting the borrower to the credit bureaus, which will mean an extremely negative impact on the borrower’s credit score, which in turn negatively impacts their ability to borrow.

5. Develop A Repayment Plan.

For those consumers who find themselves mired in debt, there is hope for being able to climb out. Being committed to being debt free and having a plan is the best way to do so. Here are a few tips.

• Limit spending to basic needs to free up cash to pay down debt.
• Ask creditors if they will reduce your card’s interest rates.
• Prioritize payments by interest rates (pay the high-interest balances first).
• Suspend charging while in repayment mode.

6. Talk To Creditors.

Credit card issuers are not under obligation to accept less than the minimum monthly payment. However it is in their interest to help customers or borrowers who are having trouble making their payments, avoid a default. Often card issuers will help, and offer a solution such as forbearance where the monthly payment is frozen for a short period of time, or they may agree to a lower repayment

7. Settle Cautiously And Be Aware Of The Consequences.

It is possible for a borrower is having serious problems with their debt and feels they simply will not be able to meet their obligations, to settle the debt with the card issuer for less than the amount owed, so long as the amount agreed is paid as a lump sum.

Debt Settlement is a step short of declaring full bankruptcy, and has a dramatic negative effect on the borrower’s credit score and should only be used as final solution after everything else for asset sales to forbearance programs have been used.

In order to be able to settle with a creditor such as a credit card issuer, the borrower needs to be several months behind on payments and be able to offer a lump sum. It is better to negotiate a deal with the creditor directly, though there are debt settlement companies which will do this for you, but charge fees.

8. Borrowers Cannot Go To Jail For Non-Payment.

People who fail to honour their financial obligations will not be arrested or put in prison. There are however some legal implications which borrowers should be aware of. Most importantly creditors can sue defaulters in a court of law and should they win be able to collect the defaulters income at source, or take non exempt property and assets as repayment.

Living debt free is within every card holder’s capability. The key is to always be aware of charging and balances, and address credit problems immediately.

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