Ways to Get Into Financial Debt

by : Paul Basco

Credit cards are an easy way to manage your monthly expenses, and get through a day without having to carry much cash. But they can also be the gateway for all sorts of financial difficulties if you are not careful.

In an effort to help you from becoming another statistic of financial misfortune, here are the top 10 ways that people get into financial trouble with credit cards:

1.I can always pay this off when I graduate or find a better job
Ah, the power of wishful thinking. Daydreams are great ways to get through a boring afternoon at work but they're really lousy for money management. But this is typical of the lies that we tell ourselves when we don't want to face our credit card balances. That balance will only go away if you are honest with yourself, and take corrective action now. Every day that you delay the inevitable, it's costing you more money, making it even more difficult to dig out of the financial hole that you're in.

2.I love shopping at this store anyway, why shouldn't I get a percentage off my purchases if I use their card?

Each time that you open a new credit account with a retailer, an inquiry about your credit-worthiness is made with the credit bureaus, and if your credit is spotty, they may refuse to issue the card which the credit bureaus will view as a mark against your score. Plus, each new card that you acquire is viewed by the credit bureaus as an opportunity to overspend, and that counts against your credit rating as well.

3.As long as I make the minimum payment, I'll be OK
As long as you only pay the minimum each month, it will only be OK with the credit card companies, because they will be making as much money as possible on you from this decision.

If you only pay the minimum, it will take years to pay down that balance and cost you many thousands of extra dollars to do so. Even if you can only afford to pay an extra $25 this month, pay it. The minimum is mostly applied to the finance charges and very little of it is allocated against the balance.

4.Failing to consider wants vs. needs
This is a huge mistake and very common. Most of us are impulse buyers to one degree or another, and credit cards make it all too easy to indulge our whims. The problem here is that this is exactly how people who get into trouble with credit cards do it.

We work hard at our jobs, why shouldn't we treat ourselves occasionally? Unless you are certain that you can you can pay off those treats in full next month, this is no treat at all, and it's spending beyond your means.

People slowly spend themselves into huge credit card debt one pair of shoes or one pricy lunch at a time. Unless you are ready to ask yourself, "Is this a want or a need?" Each time that you reach for the plastic, keep that card in you wallet.

5.My credit score's OK, it won't matter much if I miss this month's payment

This is a catastrophic decision. It most definitely matters if you miss this month's payment. 35% of your credit rating is based on the timely payment of bills. This is the single biggest factor that goes into determining your credit rating.

If you blow off just one month, it will take you a few years of steady payment to recover from this one decision, and one missed payment opens the door to additional fees and skyrocketing interest rates that make it even harder to dig out.

6.I haven't used this card in years, I'll just call them and cancel it

On the surface, this seems like a wise thing to do. But, when you cancel a credit card, it lowers your debt to credit limit ratio which the credit bureaus view as an increased risk for default. This is yet another factor that can lower your credit rating making it harder to borrow money at a lower interest rate.

If you do decide to cancel an old account that you never use, make sure that you request in writing that the lender lets the credit bureaus know that it was canceled voluntarily. Unless you do this, they will determine that the account was cancelled by the lender, which will adversely affect your credit rating.

7.But I need this cash advance NOW

If you didn't get to the bank before close, you may need that cash now but bear in mind that once that ATM spits out your cash, the interest begins to accrue on that advance immediately and usually at a much higher rate.

Also, you may be subject to different cash advance fees, and those charges add up quickly as well. ATM's are everywhere, and credit card companies love it when you use the cash advance option, because they can make even more money from cash.

8.If I lose my job, I can live on my credit cards for a month or two

If you find yourself out of work for any reason, this is a very tempting but altogether ruinous decision financially. If you are in a position where you cannot pay off the balance in full every month, you start the downward spiral of borrowing money to pay bills, and your short-term solution will end up costing you a lot more in the long-term.

9.Yeah, the interest rate is higher on this card but I love the perks

Bear in mind that, on average, only 1 cent of each dollar that you charge on your credit card will be applied towards your frequent flyer miles or whatever the rewards on your card may be.

So, that's a 1% reward on a card with a 19% interest rate. Unless you spend a ton each month and pay your balance in full each month, you're much better off going with a card that offer no perks but has a much more agreeable interest rate.

10.I can always borrow against the value of my home to pay my credit cards

This is risky. Depending on your situation, it may look attractive to borrow against the equity that you have built up in your home to pay off high interest credit card balances. But if you go this route, you are one stroke of misfortune (car repair, illness, etc.) away from possibly losing your home.

That's a doom and gloom scenario, but it happens to people all the time. If you miss a payment on your home equity line of credit, not only does it give them the green light to hike your rates, it also sets in motion the possibility of foreclosure.