Credit Card Debts: Causes & Prevention

Credit card is a type of payments system that a small plastic card issued to users of the system. Most credit cards are issued by local banks or credit unions. It is a card entitling its holder to buy goods and services based on the holders promise to pay for these goods and services.

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 late payment penalty itself increases the amount of debt the consumer has.

There are some causes that bring out the credit card debts,

1. Reduced income/same expenses.
Too often we delay bringing expenses in line with a reduction in income and are not cut down in line with the reduction in income. This obviously leads to a rise in debt. The sooner you adjust to your new reality, whether it be temporary or permanent, the better off you'll be.

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. 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. Gambling.
Either way there is a guaranteed exchange of money from you to "the house." It can be addictive, hard to stop and loans are freely available. Gambling establishments may be the only place you can mortgage your house while intoxicated and have it be legal. Do not spend tomorrow's saved money today just because you expect a promotion in your job.

4. Poor Money Management
Poor money management is one of the best reasons why so many families accumulate lots of debt. A monthly spending plan is essential. But not having a monthly spending plan and not keeping track of your monthly bills makes you unaware of where your money is going. You will be surprised at how powerful you'll feel when you are making thoughtful decisions about where and when to spend your money.

5. 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. People who experience under employment may continue to think of it as only temporary or if they are coming off unemployment feel a false sense of relief. Those people should get those expenses in line with their current income.

6. Big medical expenses
Almost all doctors accept credit cards in the USA. 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. The medical industry wants to get paid at the time service is rendered. They know that if they don’t the chances of their getting paid drops. This means more debt for you, less for them. To be fair, they are not in the lending business, but this only masks a bigger problem

7. 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.

8. No money communication skills.
It is important to communicate with your spouse or significant other and your children about finances. Keep the lines of communication open and discuss financial goals and spending styles. Many people find out that their spouses have racked up thousands of dollars in credit card debt and they had no idea that the accounts even existed.

9. Banking on a windfall

Spending tomorrow's money today is very tempting. Especially if you believe that tomorrow will come no matter what. A planned job bonus may not be a sure thing. The lesson is don't spend the money until the check clears.

10. Financial illiteracy

Many people don't understand how money works and grows, how to save and invest for a rainy day, or even why they should balance their checkbook. You are responsible for your life and your money. Financial mistakes are increasingly expensive and complicated to resolve. Get educated and get in control.

To prevent the debts of credit cards, try to keep your cards at a manageable level. There are some preventions:

1. Photocopy the credit card offer, including the interest rate and terms. Create a letter to your credit card company/companies stating that you are thinking of switching to their competition because they are offering a far more reasonable interest rate. Credit card companies do not want to lose your business and they will match or even offer a lower rate than the competition has offered.

2. If you can afford it, pay doubles the minimum payment. The minimum payment usually pays just enough to cover the interest and a little more that pays down the balance. Paying extra will pay your balance more quickly.

3. Pay off smaller balances first. It is common for a person to try to focus on their cards with larger balances first. Pay off the smaller ones. It will take less time and you will feel a sense of satisfaction when you have actually completed your goal.

4. Cut up your cards so that you are not tempted to use them. Save one card for emergencies.

5. If you have equity in your home, look into paying off credit card debt with a refinance or fixed-rate home equity loan. Do not use a home equity line of credit, the rates will rise as the prime rises and suddenly you may find it impossible to keep up with your bills.


By:
Lim Hooi Ting 0701396