Credit Cards Debt Money Advice Tips

The Inside Outs of Credit Card Debt

July 26, 2018


If you want credit but not debt, you’re not alone in your quest.  Read along to find out how.

It’s true that Americans are overwhelmingly in debt. However, you can avoid getting into credit card debt while still being able to use the benefits of plastic to your advantage.  In fact, half of all credit card users pay zero dollars in finance charges or fees. Here are 8 tips to help you understand the revolving door of credit card debt relief information in plain English.

  1. Don’t carry a balance

First of all, using a credit card regularly and staying out of debt is possible.  The trick is in not making any charges to your credit card if you cannot afford to pay off the full balance before finance charges apply.   A credit card should be used as a payment tool instead of a revolving debt instrument which will incur in finance charges and fees. This is easier said than done when temptation bites.  If you are ready to tackle credit card debt, experts recommend tracking charges and cash flow.

  1. A short-term loan

A credit card can be used as a short-term long as long as the repayment time frame is, well, short, as the name implies.  Suppose it’s summertime and you need to repair your car’s AC. Perhaps you don’t have the cash in hand and charge $700 for the service to a credit  card with an 18% interest rate. If it takes you three months to pay off the balance, you’ll end up paying a total of $737. Not a bad deal, right? Now suppose you charge another $800 on the same card and take a year to pay it off.   Now the total amount will be $1,770 out of which $270 will be in finance charges.  You get the picture.  The longer it takes you to pay off the balance, the more interest you’ll pay.

  1.  Paying off your debt is not as hard as you think

We’ve all heard negative things like “It’s easy to fall into debt and hard to climb out from under.” While it may be true that you can get into debt easily, climbing out is not as hard as it seems.

Most first time users of credit cards have a low credit limit. This limit typically increases over time if you make payments on the due date or before and keep your balance low. As the credit limit increases so does the temptation to make more charges on the card even if you can’t afford it.  The horizon line of living within one’s means starts to blur, and the revolving door of credit card debt hits you. Boom! You’re in debt, it becomes harder to make more than the minimum payment on the card, and the balance doesn’t seem ever to get lower.  On the contrary, interest will compound, and payment amounts due will increase.

While the above example is a typical scenario, it doesn’t have to mean you’re doomed.

  1. How debt affects your credit score

It’s not only smarter and wiser to live debt free, but it also  adds positive points to your credit score while high balances affect your credit score negatively.  Credit Consultants at the three national credit bureaus advise creditors on a daily basis about ways to improve their scores. One of the most important rules of thumb for excellent credit rating is to ke[G24] ep your credit card balances not higher than 30% of the total line of credit.  Let’s say your credit limit is $1000.  Then, holding the balance at $300 or below gives you a positive credit amount of $700.

Another indicator of good creditworthiness is making timely payments on all your loans. After 30 days auto loans companies will report the delinquency to the three bureaus and your score will drop.  The more payments you miss, the more your credit score will drop.  If that weren’t enough, your credit history lasts seven years; those marks will show up that long.

  1. Plan to be credit card debt free

Sit down and realistically look at the numbers you owe.  Think about committing as high a payment as possible every month until your credit card balance drops considerably or at least to the 30% benchmark discussed above.

Return to the days of living according to your means and stay in that mind frame.  You’ll see how your financial means increase as your debt decreases. It takes commitment and consistency.

Here is a doable plan:

  • Spend only on your basic needs until you pay down your debt
  • Contact creditors ask for a reduction in interest rate
  • Pay down the credit cards with the highest interest rate first
  • Don’t make any more charges on your credit card until you repay
  1. Don’t be afraid to ask for help

One of the worse things people will do when they’re in financial trouble is keeping it to themselves.  Don’t be ashamed.  Credit card debt is common; you’re not alone.  Credit card companies will work with you if you ask for help.  They would rather help you get out of debt than lose the whole balance.  The more customers that fail to pay off their debt, the lower their stocks will go.  Creditors are affected, too. So contact them, let them know you’re in a tight spot and want to repay but can’t afford the payments.  If you have been keeping up with the minimum payments, your credit score will not be affected as much, and your credit history will be decisive because you have been making payments on time.  This would be something you can leverage at the negotiation table to get a reduction in the interest rate.

Read as much as possible on the subject.  Knowledge is power. You can also turn to the National Foundation for Credit Counseling. Their consultants will guide you in the process of becoming debt free and having an excellent credit score.

  1. Don’t settle for less than the least

If you’re at least three months behind in payments, it is possible to settle your debt for less. You can do it yourself by contacting the credit card company directly and offering a lump sum.  Of course,  their counteroffer will be higher than your offer, as they will try to get the most while you will vie for the least.

Knowing how to negotiate a debt is the job of expert credit card relief program consultants. However, they will charge a substantial fee for negotiating the lowest lump sum settlement payment.  In the end, it might just not be worthwhile to hire a third party  unless your debt is much higher than their fees would be.  It never hurts to contact credit relief companies and inquire about the possibilities of a settlement for your debt, but you must first know what your total balance is.

Negotiating the settlement deal on your own would be the better option but only once you have educated yourself on the process and feel confident. Moreover, be aware that for tax purposes, forgiven debt is reported as taxable income.  Debt settlement is a radical option that should be the last resort and will affect your credit score negatively.

  1. What happens when you don’t pay

You can breathe with relief; you will not have to spend time behind bars for not paying your credit card debt.  However, unpaid balances will become write-offs for the credit card company, as mentioned earlier, and this will affect their stock. The downside for you is that the write-offs will impact your credit report negatively, even more so than debt settlement. A legal action that can be taken against you is to sue you in a court of law, and if there is a judgment against you, it is possible to garnish your wages or take nonexempted property and assets that you own for the amount of the judgment.

In summary, living a debt free life is possible if you take control of the reins, stop overspending, and live within your means.  Remember to always keep track of charges and balances on your credit card and use it as a payment tool and for short-term goals maintaining your balance at the 30% credit threshold.  If in a tight situation, ask for help and contact your creditors right away.