Credit Card Debt: the Effects and the Solution

by : Billy Alvaro

Copyright (c) 2008 Billy Alvaro

Everyone today is worried about credit card debt, but in most cases, they don't have a clue how to do anything about it. In fact, for most people once they get into debt, they don't have a clue how to get out again. In fact, for most of the population, it's much easier to get into debt than it is to get out of it, especially with credit cards. Out of all the debt in our society, credit card debt is the major cause of bankruptcy and debt management plans.

The Effects

How does it begin? Unfortunately banks play a large role in the high credit card debt that many consumers are carrying. With lucrative offers of low interest rates that expire after a year with no annual fees to rewards card that have everything from free flyer miles to cash bonuses, cardholders snap these cards up in a hurry in order to be able to take advantage of the many bonus offers. The bonus offers are the beginning of what will later culminate into a financial disaster. Unfortunately, many of these offers are targeted at young peoplenew high school graduates, college students, and recent college graduateswho are not yet emotionally mature enough to understand the importance of having good credit or even how to handle a credit card. With this early lack of knowledge about credit cards comes a future of financial chaos.

Sadly, many people do not realize the effects of too much credit card debt until they are in so deep that they don't see a way out. For many, the most classic sign of having too much credit card debtonly being able to afford to make minimum paymentsdoes not stand out as a problem. It isn't until sometime later that the real effects of excessive credit card debt begin to materializemissed payments, inability to afford even minimum payments, credit lines at or above established credit lines, and borrowing from one card to pay payments on another card. Sometimes those in serious credit card debt will apply for another credit with a higher limit and lower interest rate with the original intention to get rid of the other cards and use the new card. Some may even take out a consolidation loan, and after the balances are paid on their credit cards, they start using them again instead of getting rid of them. For some the reality does not hit home until the bill collectors are knocking on the door, the judgments are issued, and they attempt to apply for a loan only to find that their credit is so severely damaged that they can't even borrow a few hundred dollars to buy some furniture.

The Solution

Once you have gotten into severe financial trouble with your credit cards, the next step is to devise a plan to eliminate the debt and get back on your feet. There are several plans you can utilize depending on the severity of the damage. Following are some solutions beginning with a program for the debtor who has done the least amount of damage and ending with the most severe cases.

* If you are one of the lucky ones who becomes aware of financial issues before it gets totally out of hand, it's much easier to solve the problem. One of the easiest ways to pay your credit card debt if you are still at a reasonably manageable level is to take the credit card with the lowest balanceor highest interest rate if all the balances are close in valueand add some extra funds each month. Even if it is only $10-15, anything above the minimum payment will help the balance reduce quicker. How so if you are only paying an extra $10-15 a month? Here's how: when you pay off that first credit card, take ALL of the money you were paying on it, and add that to the minimum payment on the second highest balance or interest rate card. In other words, if you were paying a total of $50 a month on Credit Card #1, when you pay it in full, add that same $50 to your payment on Credit Card #2. Follow this same process until all of your credit cards are paid in full and refrain from using them other than an extreme emergency (car or appliance not working, medical bill, medicine for illness), and do not under any circumstances use the one you are in the process of paying in full. If you have more than two cards, get rid of the except any used solely for business.

* Another outlet you may want to use is a consolidation loan. Of course, in most cases you will need to own real estate to obtain a consolidation loan. This will give you a longer term and lower interest rate, but you must be careful if you're using your home as collateral. When you have paid the cards in full, cut them up or lock them away until you finish paying off the consolidation loan. Some people make the mistake of obtaining a consolidation loan, only to begin using the cards again and create the same financial situation from which they just evolved.

* Some card issuers have a program where they will lower the interest rate and payments, but if you have several cards, this program may not work well for you. If you miss one payment, the program becomes null and void, and you are right back to where you were.

* Debt consolidation involves working with a debt management company in order to develop a repayment schedule. They will work with your card issuer to obtain a lower interest rate, and sometimes eliminating the interest rate totally, to allow you to make one payment to the debt management company that will distribute the payments to your credit card companies.

For those who waited too long to do something about their situation, bankruptcy may be the only answer. That is a step you want to avoid whenever possible, so unless you have extenuating circumstances, recognize the extent of your financial situation before it's too late to work with your creditors.