Credit cards provide a whole new world of funding that teeters on the fine line of financial relief and potential debt. The lure of plastic finance offers shopping convenience; a chance to build good credit; and becomes quite useful in times of great need. Unfortunately, many individuals misuse and abuse their credit privileges when they charge more than they can afford to pay back. The lingering temptation to overspend and the tremendously high interest rates associated with most credit cards is enough to send users into extreme debt. Today, millions of people are struggling to deal with mounting credit card debt without ever knowing the proper way to prevent the problem in the first place.
What is Credit Card Debt?
Credit card debt can become a vicious cycle of living beyond the capacity to fulfill your duty to pay off borrowed money. Debt usually accumulates every time a user purchases an item or service through the credit card system, which then increases the amount of interest due. There are also penalties added to the total amount owed when a consumer fails to pay the company for the charges they have applied to the card. Sometimes, late charges may cost between $10 and $40 â€“ an avoidable expense if caution and restraint is exercised . If a cardholder exceeds their limits of borrowing, they are also charged an over-the-limit fee of up to $39 until their balance is taken down below their credit limit.
The Negative Effects of Credit Card Debt
The most obvious effect of credit card debt is seen through owing money that one is unable to pay off. The accumulation of late fees and penalties can turn seemingly low debt into a credit-wrecking disaster that takes many years to fully recover from. When a credit card bill remains unpaid for a certain amount of time, it is considered a defaulted account, which is reported to the credit bureau and becomes a blemish on your credit report. In the long run, credit card debt may stop a consumer from receiving bank loans or obtaining financial help from others. The embarrassment and limitations that credit card debt causes an individual also leads to an increase in stress.
Credit Card Debt Risk Factors
While anyone can become a victim of credit card debt, there are certain factors that place individuals at a higher risk. One of the most sought-after victims of credit card debt is a college student, who becomes trapped in the allure of their “very own” source of available funds. Credit card offers often swamp their mailboxes and representatives frequently situate themselves in front of the food court or bookstore. Intriguing gifts, the promise of extra rewards, and low introductory interest rates are used as bait. College students tend to bite, ignoring the negative long-term effects that threaten their future financial stability.
Unfortunately, most college students will get their first credit card by the fall of their freshman year and often times, by their senior year, they will have doubled their debt. The numbers are staggering, as more than 80% of college students will possess at least one credit card during their attendance .
Additional risk factors associated with credit card debt include people living paycheck-to-paycheck; mounting bills; compulsive shoppers; and people who already possess one credit card.
How to Prevent Credit Card Debt
Although the best way to prevent credit card debt is to decline offers in the first place, there may come a time when a credit card becomes a real lifesaver. The greatest advice to consider in regards to credit card debt prevention is to proceed with caution and make your payments on time. Additional prevention methods include:
a) Choose Cash Over Credit:
When possible, choosing to pay for purchases with cash rather than use credit is highly suggested. Although you have extra cash in your pocket for the meantime, the rather high interest rates on credit cards costs you more money in the long run .
b) Stick to a Budget:
Usually, credit card debt accumulates because individuals live beyond their means. Making a monthly budget and following it helps consumers break their dependency on credit.
c) Limit Your Amount of Credit Cards:
When a person carries around an assortment of credit cards, the temptation to use each one becomes too great. Some consumers prevent credit card debt by limiting the number of cards they possess to one or two. Another pitfall people face involves applying for new credit cards because they have “maxxed out” the limits on current cards. The more plastic you own and use â€“ the higher the risk of credit card debt.
d) Resist Sales, Bargains, and Deals:
If you are unable to pay for sale and bargain prices with cash, it is unwise to rely on credit cards to make your purchases. Usually, sale items are things not immediately needed, but rather serve an interest or fulfill a desire. It is suggested to only make purchases on a credit card that are absolutely needed (such as a household repair or medical bills) in order to avoid credit card debt.
e) Read the Fine Print:
Today, almost everyone is bombarded with “pre-approved” credit card offers that come in the mail. Some promise low introductory rates, while others tempt with “special” bonuses. A popular approach is to make consumers feel unique because they were “chosen” or “pre-selected” to take advantage of a special offer that expires in a specific amount of time. All of these tactics are used to entice consumers into applying for the credit card. Most often, there isnâ€™t anything too special about the card in question. Overall, it is important to read all of the fine print associated with a card before accepting an offer.
f) Know Credit Card Terminology and Lingo :
The credit terms and conditions of a card often evolve and change and when consumers are unaware of what to expect and when â€“ they often fall into credit card debt. It is important to compare terms and applicable fees regarding credit card offers, but this is not possible unless you fully understand what you are dealing with. Credit card users need to familiarize themselves with the:
â€¢ Annual Percentage Rate (APR): measures the cost of credit expressed as a yearly rate
â€¢ Free or “Grace” Period: avoids finance charges when balances are paid in full before due dates
â€¢ Annual Fees: includes yearly membership or participation fees (ranging from $25 to $100)
â€¢ Transaction Fees: includes fees for late payment, cash advances, and exceeding the credit limit
h) Donâ€™t Use a Credit Card Like a Loan:
A credit card can become a useful tool for people able to conveniently make purchases and pay off the balance before finance charges kick in. It makes a great substitute for cash, but when people are in need of a high lump sum that they are unable to immediately pay back, the chances of credit card debt becomes inevitable. It is unwise to use a credit card like a loan because the high interest rates are sure to dig a deep, unforgiving financial hole.
i) Credit Counseling:
Before turning to credit cards to become a savior for all of your financial woes, making an appointment with a credit counselor may help place you on the right track to avoid credit card debt. Often, credit cards solve a momentary problem, but in turn, cause more problems down the line when repayments and high interest rates become a heavy burden. Credit counseling helps people keep track of bills and assists consumers in creating a workable budget. Many nonprofit options can be found at various universities, military bases, housing authorities, credit unions, and branches of the U.S. Cooperative Extension Service .
j) Pay All or Most of the Monthly Balance:
To prevent credit card debt, it is recommended to pay off the entire outstanding balance each month so accumulating charges donâ€™t burn a hole in your pockets.
k) Make Timely Payments:
Late fees and penalties for missing a payment inch consumers closer and closer to credit card debt, especially when dealing with a company that raises interest rates each time a late payment is received. Also, repeated late payments cause great damage to credit records.
l) Avoid Cash Advances:
Consumers who use credit cards to make cash advances face a multitude of unnecessary charges and fees. For starters, higher interest rates are charged and an extra transaction fee applied to the total credit card bill. Cash advances also ignore the usual grace period associated with other credit card purchases. To prevent this accumulation in credit card debt, it is suggested to pay a visit to the bank or use an ATM card.
m) Ignore Special Services:
Credit card companies often advertise extra services that provide consumers with anything from credit card fraud protection to travel club memberships to life insurance. Usually, these services are overpriced and often a waste of time and money. Many people who sign up for the offers barely reap any benefits.