Credit Card Debt Questions: We have Answers
Have you ever found yourself in a situation where you need to take care of an emergency, but don’t know where to start? Are you living beyond your means? If yes, then holding a credit card debt seems like a viable option. Of course, it will sort out your problems at once. But, if you fail to honor the repayments, you will need face the consequences of your actions.
Understanding the genesis of your credit card debt is paramount. Is it because you bought a luxurious asset? Did it cater for a medical emergency? The answers to these questions will determine how you will go about your financial predicament. But first, knowing the meaning of a credit card debt is essential.
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1.0 What is a Credit Card Debt?
Holding a credit card debt is a situation where the one or more banks/companies offer you a credit card to fulfil your unsecured financial obligation. As soon as you receive the card, you can easily purchase or make advance payments. Unlike other types of loans, credit card debts attract higher interest rates and harsh penalties for late payments. These two measures are there to make up for the collateral you are supposed to submit when borrowing other loans.
2.0 How Does a Person End up in Credit Card Debt?
Your reasons for holding a credit card debt may vary from time to time. However, you may be having some common debt habits that can lead to the debt. Because of this, it may fail to get eliminated completely. Here are some common debt habits that can fuel a financial ruin;
Paying for Everything with Credit Cards
Growing up, you may have noticed that your parents paid for everything using credit cards. Most probably, your parents may have adopted the habit from their parents. Paying off bills and expenses using credit card has become a vicious circle, few people can escape. The only way to avoid this is by using cash to pay for items instead of credit cards.
Transferring Balances from One Card to Another
You are so fond of shuffling credit cards, that you forgot the implications of your actions. When you do this, the APR goes up by more than 15%. Paying off your balances instead of shuffling makes it easier for you to monitor and repay them in good time.
Justifying Extravagance
Wanting to have the best things in life is a good experience, until it leads you to a financial ruin. You may make justifications for your debt habit at the moment, but you will realise the cost of your actions. You can still forego things like Christmas presents, a luxurious card, or a designer handbag. It doesn’t take rocket science to explain to people why you need to be financially disciplined.
Failing to Come to Terms with Your Credit Card Debt
Most people would rather bury their heads in the sand instead of tackling their problems as they come. The truth is, this doesn’t erase the fact that your debt is here to stay. To break free from this habit, you need to be familiar with your credit card balances. Match the purchases with the balances. Calculate your annual APR and other outstanding fees. Come up with a payment plan to free you from your debts.
You Are an Impulse Buyer
If you have found yourself in a situation where you buy things you don’t want or need, you are an impulse buyer. Of course, people have bought things on impulse thus increasing their credit card balances. There’s no better way of quitting this habit other than tailoring a budget. In most cases, you will realise that thing you want to buy only ends up as clutter.
Promising to Do Better
You are so used to your credit card that you realize you can’t do without it. You promise yourself that you won’t be using it from then henceforth. Be a person that stands firm on their decision. Still can’t resist the temptation of using it? Then it is better to leave them at home.
3.0 The Types of Credit Card Debts
Too much of anything is dangerous. It doesn’t matter whether it is alcohol, food, clothing, or the internet. These things can only benefit you, if they are used in moderation. Likewise, understanding debt means acknowledging that it can take different forms. Since it varies from person to person, it is important to recognize the role it plays in everyday lives.
Be it consumer debt, business debt, or national debt, the tool is only considered viable if it serves its purpose. But when it is standing between you and your goals, it can be a monster. You need to assess your debt situation to gain control over it.
Mortgages
Most Americans dream of owning their homes thanks to mortgages or home loans. Because they don’t come cheap, most of them will be in massive debts for the rest of their lives. Unlike other forms of debts, mortgages change your attitude towards life, because they come with better interest rates. Think of it as a doable debt that will make you enjoy being a homeowner.
Using your home as collateral to get a home loan at a decent rate, is possible. Consequently, they will take full control over your prized asset if you fail to keep up with the payments. Remember, you may also come across bad mortgages that can lead frustrate you.
Auto Loans
One of the best ways of acquiring a car or a truck is by applying for an auto loan. Of course, it is always advisable to go for the one you can afford. Everything must have their good and bad sides, so auto financing isn’t any different. When you compare how car dealership was conducted eons ago, you will realize that things have changed for the better. Now, it is impossible to short-change customers because they rely on the internet to find out more about the deal.
An online loan calculator is tool that helps customers to understand various elements surrounding the loans they have taken. It gives you an in-depth understanding of your debt in relation to the auto loan. Now, you can come with a plan to free you from the financial debt you have incurred after taking all the elements into consideration.
Before taking a car, you need to assess whether you will afford the loan. If not, look for a cheaper alternative. Draft a plan to ensure you honor your monthly payments. Committing a down payment is one way of ensuring you repay your debt at a lower interest rate.
Business Debt
Any financial advisor can tell you that taking a business loan can be good or bad, depending on your objectives. To be on the safe side, it is essential to do due diligence, assess your credit history, and decide if you are credit-worthy.
Being in business loan debt is a recipe for a financial ruin, especially for your small business. You could be borrowing to salvage your situation, only for things to get worse. You realize that each time you borrow money, things tend to fall apart. Either you end up with dead inventory or sales keep going down.
Believing it is going to work isn’t viable as long as you don’t have a realistic business plan. It gets worse when you use the business money to finance your personal expenses. Taking money from your business is more like stealing from yourself. This can lead you to more debts in future.
Student Loans
One of the most recent reports by New York Fed reveals that outstanding student loan debt has greatly increased in billions of dollars. Some may be evading the debt for fear of remitting their taxes. As one of the beneficiaries of student loans, it is important to repay it using bit by bit. If you are having trouble keeping up with the payment, you can look over a variety of options. If possible come up with a bill consolidation loan or student loan refinancing to settle this, once and for all.
Credit Card Debts
Credit cards are the most commonly used forms of payment for purchases. The plastic money gives you the power to order, book, and pay for specific goods or services. However, it is one of the most problematic debts mankind has ever faced. Since they offer unsecured loans, the credit card companies tailor higher interest rates.
One of the worst decisions you can make as a credit card holder is not having a budget. Each time you head out to the local store, you end up with stuff you don’t need in the first place. Settling the debt even becomes more difficult when you have a poor credit score. You may be lucky to get a lender with a better deal, but that doesn’t make you immune to poor card management. To prevent this from happening, it is always advisable to but only what you included in your plans.
What Do You Gain from Responsible Credit Card Use?
In the past, people were forced to pay for goods and services using cash. Making large purchases seems risker because they had to carry large sums of money. This was a perfect recipe for theft. Credit cards, on the other hand, don’t put you in the risk of revealing how much you are going to spend. You can still buy a good worth $1 million without attracting unwanted attention.
Credit cards are the best tools for the online business community. Customers can now pay for products from the click of a button. Because they have high quality fraud protection software, it is difficult for fraudsters to access the customer’s account.
There is no better way of monitoring your account than using a credit card. Each time you make a purchase, the said item will be recorded in the statement. If you are using a card with bonuses and discounts, the better for you. And if you are still debating which credit card to get, we suggest that you take a look at the options below:
What Are the Downsides of Credit Card Use?
You have been using your credit card for a while, then you realize that you have not been monitoring how you use it. Then the worst happens. The credit card company slaps you with a $20,000 debt, though you don’t remember spending all that amount. Your entire world starts falling apart. You start asking where you went wrong, and how you ended up in a deep financial turmoil.
1. Worse Chances of Getting an Excellent Credit Score
You see, holding a credit card debt limits your chances of getting an excellent credit score. It gets worse when you spent that money on things you didn’t need.
2. Debts Can’t Be Paid at Once
Unlike other loans, credit card debts can’t be paid at once. In fact, most of them won’t penalize you for making late payments. They actually enjoy placing hefty fees on late payments so that they can make profits. That is why they will be quick to send a notice one day, long before you pay off your loan. They will even raise your limit, so that you can keep using the card.
3. Higher Interest
As a credit card user, you are more likely to submit minimum payments. This will cause your outstanding balance to keep piling over the months and years. For this reason, you will need to part with more interest for the next coming years. These companies keep hoping that you will maintain this vicious circle so that they can keep making profits.
4.0 How Do You Pay down Your Credit Card Debt?
One way or another, everyone is struggling with debt. Some will choose to pay it off, while others may declare bankruptcy. The latter seems like a great idea to retain all your possessions and avoid paying it off. However, you will need to borrow loans in future. How are going to do that if you have already informed lenders on your inability to pay? This option is only good when you are at the risk of losing your priced properties, but it isn’t the best solution. That is why you need to pay off your credit card debt. So, how do you go about it?
Dispose What You Don’t Need
It could be a fancy watch, designer shoes, or a gym equipment, that got you into credit card debt. Each time you take a good look at it, you realize that it is better to sell it to offset your payments. It may not go at the initial price you bought it at, but you will still get some money out of it. Go to any online store that allows people to sell used items. Post it there, and wait for a potential buyer.
Get a Side Hustle
You have been a diligent employee at your place of work, but you realize that your salary can’t sustain your debt. This is the right time to find alternative ways to earn more money. You can consider going for a part-time job or getting a raise. Juggling all these hustles may seem difficult at first, but it will be worth your time and efforts. Think of it as your financial breakthrough. Better still, it will assist you in paying off your debts sooner than you imagined.
Go for the Debt Snowball Technique
Paying off more than the minimum payment is one of the best ways of eliminating credit card debts. It becomes better when it is intertwined with the debt snowball method. Here, you are allowed to put down all your debts from the lowest to the highest. You can start by paying off the lowest debt, then move to higher balances. Each time you succeed at repaying your debt, it means you are opening up to more opportunities to clear the rest.
The snowball method was designed to give people the psychological satisfaction to help them manage their debts with ease. You will realize the truth of these statements when your small balances disappear to pave way for higher debts.
Some people may not be comfortable with this method. Some financial advisers advocate for debts with higher interest rates first. This may work for people who want to avoid making similar mistakes in future. But, it can be quite demotivating for them if they exhausted all their savings on debts. Whichever method you use, always weigh the pros and cons to make the repayment process manageable.
Request for Bills with Lower Interest Rates
A credit company can lower your interest rate depending on your ability to pay your bills on time. It will assess your financial discipline and lower it to help you manage your credit card debt situation. Other than that, you can negotiate other bills to reduce the debt you have incurred. In most cases, it creates space in your budget so that you can pay your debt as soon as you can.
If your current water bill isn’t agreeing with your financial situation, then it is time you approached a company with a better deal. In all you do, always ensure you compare the rates to avoid getting duped.
Accept that You Are in Debt
Living in denial when it comes to debts doesn’t mean it will go away. Coming to terms with your debt prepares you for great plans. Put all your debts in writing. If you aren’t sure, you can go to your credit card company to confirm if you have made a wise choice.
They will present the most recent debt loan statements, credit report, and your credit score. This allows you to determine whether you qualify for a lower interest, debt-consolidation loan. You will know your credit report at the end of the statement.
Once you have gathered all your debts, you can categorize them into different forms. A debt tracker will help you in deciding which debt should be settled first. If you are operating the card as a joint account, then it is important to come up with a lasting solution before it gets out of hand.
Make More than the Minimum Payment
Credit card companies allow users to pay the minimum amount, but the case is different when it comes to debts. You have realized that each time you make the minimum payment, the debt keeps piling. If you aren’t careful, your credit score will become lower. Now is the right time to start paying more than the minimum payment.
This measure applies in all types of loans including student loans, personal loans, and credit card debts. If you start paying more, you will lessen the interest and get yourself out of debt sooner than you imagine. If you aren’t still sure about how you have paying your debts, then it is advisable to use a debt payment calculator. This not only encourages you to submit your payments on time, but it also acts as a standard measure for your success.
Understand How You Accumulated the Debts
Acquiring a debt seems rosy, until you come to terms with payment. You can blame it on your unending desire to have an extravagant lifestyle, but that doesn’t erase your debt situation. Understanding why you keep falling in debt is the first step towards recovery. Find out why you need to be out of debt. Besides, it lets you have a clear conscience.
Come up with a Plan
Now that you have calculated how much you owe credit card companies, it is essential to come up with a plan. You can create a budget that will illustrate the amount of money you will be spending to service your loan. It will also show you what you are buying, where, and why it is necessary to make those informed decisions.
You may have been used to hiring a cab to your place of work, each morning. After comparing the rates, you decide to take the bus instead of the cab. This strategy is known as the bare-bones budget. This helps you to spend on things you require. Remember, this varies from person to person, which is why it is short-lived.
5.0 Which Credit Card Repayment Methods Can You Use?
No one likes to pay off debts, especially if they are huge. There is no better way to sleep better, other than repaying it off. There are several ways to get yourself out of the mess. However, solutions vary from person to person. If the current one doesn’t lead you financial freedom, you might want to consider other options. Here are the most common credit card repayment plans that have worked for most people:
1. Debt Consolidation
You have already identified all your debts, it is time to put them in one place. This means you round them up for one single payment, instead of doing it separately. This method also has its downsides. When you choose to go down this road, you are likely to service it for the rest of your life. Furthermore, the interest rate as at now may not be the same over time. Be prepared for any eventualities.
2. Debt Financing Companies
Desperate times always calls for desperate measures. When you are in debt, you will do everything in your power to be free. You may be tempted to approach a debt financing institution to lend you some money. Of course, they will pretend to negotiate a better deal on your behalf. The problem comes after they have serviced your loan. Instead of relieving you off your debts, they will expect you to make heftier payments. The issue of ‘borrowing from Paul to pay Peter is a sure-fire for disaster.
3. Using Your Home as Collateral
Most financial advisers would never recommend using your home as collateral. What if you fail to repay your credit card debt? Won’t they repossess it without batting an eye? When this happens, you will have nothing to your name. Losing your home and holding bad debt is too much to handle. Interestingly, home equity loans has worked for some people who were able to pay off their debts on time. But still, you have everything to lose if you don’t invest the money you have borrowed wisely.
Do These Methods Work?
Well, many people can attest the fact that one of the three methods has worked for them. The truth is, these strategies only solve your temporary problems. Even if you clear all your debts at once, you will still be enslaved by it. Your attitude towards life when they have been cleared tells a lot about your future financial moves. It is up to you to change or the vicious circle keeps taking over your life.
Creating a budget is one of the best ways of ensuring you don’t fall back into temptations. Now, you will remain accountable for every cent you spend.
Conclusion
If you are a credit card holder, then it is time you evaluated your spending habits. Each time you use your card to purchase a product or a service, you need to come to terms with the consequences of your actions.
Be it a student loan, business loan, credit card loan, or an auto loan, you should ensure you pay it off as soon as you can. That way, you will have a remarkable credit score. Bottom line is, other people have face their problems as they come. You too can enjoy debt free living!