Credit Card Debt

“You’ve been pre-approved!” You see these all the time. Credit card companies do anything to gain your business – why wouldn’t they? With their huge interest rates, that’s a lot of extra cash they can profit off you, if you carry a balance every month. And with it being so easy to simply put all your purchases on this convenient little piece of plastic, it’s no wonder so many people carry massive credit card debt. But you don’t have to be chained to your credit cards.

Credit Cards, and How They Work

There are certainly many advantages to having a credit card. It is a convenient way to make your purchases without having to carry cash or your checkbook with you. However, when you compare the tremendous negatives of credit cards, the drawbacks quickly outweigh the benefits.

The credit card companies earn their greatest profits from the exorbitant interest rates they charge consumers. When you receive your statement monthly, it outlines the details of all of your activity, including purchases made, any late or outstanding fees, interest payment, and the total amount owed.

The card holder has to pay a minimum amount of the total bill by the specified due date. If you pay the bare minimum, the remaining balance gets charged interest and is carried over to another month.

The danger of credit cards stems from the interest that consumers must pay on their purchases - if the debt is not immediately paid, then the initial interest accrued becomes part of the total amount owed, which is subject to additional interest. It is identical to the technique of compound interest, but this time it is working against your financial health.

Credit Cards and Your Credit Report

When you have credit cards, they will be listed on your credit report as a revolving account. The credit bureaus give a rating on how well you pay your monthly amount due. The ratings range from 1 - 9, with 1 being the very best payment history. They will be listed as “R” for revolving, followed by the rating, such as: R1, R3, R9, etc. Therefore, how you manage your credit card debt and payments is directly reflected on your credit report, which can impact not only your interest rates for mortgages and car loans, but even the type of jobs or leases you can obtain.

Choosing different credit cards for different solutions

Because of competition within the credit card business, providers have developed many incentives to gain market share, such as gift certificates, frequent flyer miles, and cash back. For many credit cards, the more you charge, the more rewards you will receive. Unfortunately, this is how people plunge deeper into credit card debt.

There are several different types of credit cards that fit various needs, depending upon your financial history and spending patterns. In general, cash rebate cards are the most valuable, as you do not have to accrue “points” to gain limited rewards; instead, you can use your 1% or 2% cash back to purchase whatever you would like – or put it into your savings account.

Below are some of the many types of credit cards:

• Low Interest Credit Cards - People with excellent credit qualify for credit cards with reduced interest rates.
• Instant Approval Credit Cards – There is no waiting period required for this type of credit card because it is approved instantly.
• Bad or No Credit Credit Cards - People with bad credit or no credit at all can obtain these types of cards, but the interest tends to be exorbitantly high.
• Rewards Credit Cards - This credit card lets you earn prizes, points, and other rewards when purchases are made.
• Cash Back Credit Cards - Earn rebates for cash back and cash incentives when you use the power of your purchases.
• Student Credit Cards – These cards are specifically designed for college students with little or no credit history.
• Business Credit Cards – These are an effective way to manage business expenses, whether for a small business or large corporation.
• Balance Transfer Credit Cards - This credit card consolidates credit card debt into one low payment.
• Hotel & Airline Credit Cards - Exotic vacations and future business trips earn flying miles and points.
• Prepaid Credit Cards – These offer the convenience and benefits of standard credit cards, but spending is limited to your own prepaid credit limit.

Credit Card Debt Management Tips

There are many trustworthy organizations that can advise you on how to get yourself out of credit card debt. The National Foundation for Credit Counseling would be the first place to search for a customized credit card debt solution. They have highly qualified counselors can create a customized financial plan to help you accomplish your own credit card debt solution.

The following tips are helpful as a credit card debt solution; however, if you do not have the motivation or discipline to reduce your credit card debt, then you may want to contact the NFCC or other debt management programs. Through a personalized credit card debt solution, you can become debt free. There are several easy strategies that you can implement into your daily life to begin reducing your debt:

• Try to “Kill” accounts.  Focus the majority of your resources towards one account at a time until you kill it completely.  (BUT DO NOT CLOSE THE ACCOUNT ONCE IT’S PAID OFF!!!)
• Paying off credit cards with the highest interest rate first is a good idea, but killing off smaller accounts first may allow you to free up extra cash flow - providing more money to pay down other debts.
• Pay slightly over the minimum due on all revolving accounts to minimize the chances that the card issuer will raise your interest rate.
• Transfer high interest rate credit cards to ones that have lower interest rates - but ONLY if you’re sure you’ll be able to continue making the minimum payments on time.
• Refinance your house and include the balances onto the lower-interest home-equity loan (Be careful with this, or you may lose your home if you can’t pay the loan!)
• Do NOT close any accounts - even those with zero balances.  You will NEVER increase a credit score by closing an account.  The exception is closing accounts that charge annual fees once you’ve gotten your credit score where you want it.
• Do NOT spend all your money each month on paying down debt.  Even though you have debt, don’t neglect building up your savings accounts.  The best way to reduce debt is to make sure you don’t have to continue using credit cards to pay monthly expenses, and only when you have a savings cushion is that possible.

After having taken these steps to get out of credit card debt, it is important to evaluate your budget and spending patterns to prevent future debt from accumulating. Having credit is useful, but if it is not handled carefully, you could find yourself having to seek a more drastic solution to your credit card debt.