Debt Help

First Timers’ Guide to Preventing Credit Card Debt

Getting approved for your first credit card can be an incredibly exciting thing. However, the mountain of responsibility that comes with that piece of plastic can also be incredibly daunting.

Bills, payments, interest rates - - it can get complicated, and it can keep piling up. In April 2008, the Federal Reserve reported the U.S. total credit card debt to reach $951.7 billion, the highest amount ever recorded. And with worsening economic conditions and inabilities to make ends meet, we can understand why.

But you don’t have to add to that number. Preventing credit card debt is the key to unlocking your financial freedom from here on out, and we can provide you the simple, no-hassle ways of living in credit card debt-free paradise.

Step 1: initially, put a low limit on your credit card. Credit card companies may already assign you a low limit by virtue of the fact that it’s your first credit card, but if that limit is up to you to set, start low. It may get frustrating when you can’t purchase huge amounts on your credit card, but over the months you’ll understand how fast money goes and how easy it is to rack up a high bill. Putting a cap on your credit card spending will not only train to you to understand budgeting, but it will also proactively prevent you from charging more than you can afford for that month. Once you get the hang of having a credit card and paying your bills each month, you can gradually increase your limit.

Step 2: develop a sure-fire way to track your spending. Whether you religiously keep receipts, make endless charts on Excel, or write down your charges on the back of a napkin, seeing in writing the amount you spend day-to-day will give you a great sense of your credit card charging patterns. If you monitor your spending, you will never be surprised by your bill when it comes after you at the end of the month. Rather, you will know exactly the amount you have to pay, and you can plan for it. If you can foresee that your bill will be higher than what you had accounted for at the beginning of the month, then take on a few hours of overtime or give up a Saturday night to babysit – the key is knowing in advance what you have spent (by keeping track of your receipts and charges), and what you’ll need to come up with to pay it off.

Step 3: this is perhaps the most important, but most difficult, strategy to prevent credit card debt. At the end of each month, when it’s time to deplete your bank account and pay off last month’s credit card bill, pay the entire amount listed on your credit card statement. Your credit card terms will state, for example, that you only have to pay $10 of your bill. It’s tempting isn’t it – only paying $10 of this month’s $500 credit card bill? But the $490 will come back to haunt you. Next month, you will get charged interest on that $490, and with current interest rates being so exorbitant (they can charge up to 20% interest in some cases), instead of just paying the $500 for the month, you’ll owe $588 the next month, in addition to that month’s charges. And this will continue to compound and compound until you’re lying face down in a mountain of credit card debt. Simply paying the entire amount of your credit card bill every month prevents you from ever having to endure the wrath of interest rates and instead, leaves you debt-free each month. Yes, it might leave you with less money in your bank account for that month, but in the long run, getting charged interest on postponed payments will doom you to eternal credit card debt hell.

How to Consolidate Credit Card Debt

When needing a quick fix to pay off your mounting credit card debt, consolidating your debt may be one of your only options to avoid bankruptcy or continued years of credit card debt. Debt consolidation, in other words, entails paying off all your various outstanding credit card bills in one swoop, and leaving you with one substantial pile of debt to pay off – rather than dozens. This can be an attractive choice for sure, especially when certain methods of debt consolidation offer lower interest rates than the mean credit card companies charge. In addition, paying off only one bill or loan per month is a hell of a lot easier than dealing with multiple sources of debt. However, debt consolidation has its tricks, and you need to watch out for the growing risks of consolidating your credit card debt before they become worse than the debt you had in the first place.

One way some choose to consolidate their debt is by applying for a home equity loan. By leveraging the value of your residence, you can receive the funds needed to pay off all your current credit card debt. However, this option leaves you with a huge risk: either pay off your home equity loan, or risk losing your house. If you default on your loan, the lender can potentially foreclose on your house, which ultimately is much worse than just having good old credit card debt to pay off. However, if you know for a fact you can pay off this loan in a reasonable amount of time, consolidating your debt this way should be quick and painless: you’ll quickly pay the debt you owe, and although now you’ll have to pay off your home equity loan, you’ll generally have a lower interest rate on the loan than you would have had on your credit cards.

Another, less risky option includes taking out a debt consolidation loan. Like a home equity loan, a debt consolidation loan allows you to take care of all your outstanding credit card bills at once; you get the loan, you pay off your debt, and then you make a single payment on that loan each month, rather than writing out separate bills for each of your credit cards. A word of caution, however: make sure the fees and rates associated with your loan truly are better than those associated with your current credit cards. Chances are, the rate they charge you won’t be so low since you’re not leveraging any of your assets (like you home, for example). Furthermore, make sure you compare prices and find the loan that’s right for you, or else you’ll continue to ensnare yourself in debt trouble down the road.

Finally, be wary of zero-percent credit cards. You’ll get offered credit cards that will entice you with no interest payments, so you think you’ll be able to pay off your credit card debt with one credit card that won’t charge you interest. If it sounds too good to be true, it’s because it is. Once you miss one payment, that “zero-percent” rate will no longer be zero, and then you’re back to the same debt spiral you were trying to get yourself out of in the first place. Furthermore, hidden fees and costs are also important to watch out for when something like a zero-percent credit card sounds too good to be true.

How to Avoid Personal Bankruptcy

Credit card and personal debt can pile up so high, that people eventually feel they have no way out. Late payments and high interest rates continuously feed off each other, and debt relief seems impossible.

However, there is relief, and there is a way to manage your unmanageable debt to where you don’t have to file for personal bankruptcy. Bankruptcy is viewed as a last resort method of freeing yourself from debt, and it should stay that way. The consequences of personal bankruptcy – damage to your credit rating, inability to receive credit cards in the future or secure loans, emotional distress – are endless and devastating.

Obviously, avoiding getting knee-deep in debt in the first place is the first way to avoid such consequences. Personal budgeting, monitoring spending, setting credit card limits, strictly using cash and debit cards – these, like keeping a healthy diet and exercising to lose weight, are the simple, sure-fire ways of finding financial freedom.

However, if you land in a pile of debt at some point, there are ways to escape without having to file for bankruptcy.

First, you can seek to consolidate your debt by applying for debt consolidation or home equity loans. These loans will provide you the funds you need to pay off your debt. Of course there are risks to using these loans to absolve your debt: for example, if you were to default on your home equity loan, you run the risk of losing your home. However, if you feel confident you can successfully manage these loans, debt consolidation is a quick fix to a seemingly eternal cycle.

Second, you can gradually pay off your debt and avoid bankruptcy by committing yourself to paying incremental amounts of the balance each time you have to pay your credit card bill. Most likely, you got into debt initially because you found yourself unable to pay the full amount of your bill at the end of the month, and so all you paid was the minimum amount required. This got you into trouble because the amount left unpaid was charged interest, which accumulated and grew to absurd degrees, leaving you with more and more debt each month. However, if you make sure to pay above the minimum each month – and continue to increase this amount – you will eventually catch up with your debt. It might take awhile, but in the meantime you can use cash and debit cards to avoid piling on additional charges.

With all that said, perhaps the best way to avoid personal bankruptcy is simple: don’t bite off more than you can chew. Simply put, don’t purchase things – homes, clothes, cars, etc. – that you can’t afford right now.

If all else fails, filing for bankruptcy isn’t the end of the world. Get a good bankruptcy lawyer, go through all the necessary procedures, and you’ll resurface from the mess a new person. Just make sure your fresh start is used to its fullest, so that next time you will know how to keep yourself forever in the black.