The Slippery Path of Credit Card Debt

Written by A Guest Speaker on May 21st, 2008

The Slippery Path of Credit Card Debt
Written by Brennan Kingsland

Isn’t it fun to find a wonderful bargain while you’re shopping? There’s something almost magical and fulfilling about handing over that plastic card and signing the dotted line so you can gather up goodies. In fact, it’s so temporarily rewarding to find such a deep discount on that jewel of a purchase, that it’s easy to convince yourself you are being a savvy shopper.

But are you really saving money with that special deal? Not unless you are able to pay off the balance before it becomes due. Otherwise, you have to include the price of of your finance charges into the cost. And that can add up very quickly!

There are often valid reasons for using a credit card. They’re an excellent way of keeping an accurate record of business expenses. And trying to obtain a rental car without a credit card is a very expensive process. But, unfortunately, most of us use our credit cards in a way that winds up costing us more than leaving a cash deposit for a rental car ever would.

Have you read the fine print on your credit card contract? Do you really understand what interest rate you are paying for using that financial institution’s money? Do you have any idea of what that money, or that “great bargain”, is really costing you?

One thing you need to understand about using credit cards is that, unless you pay the amount due completely each month before interest is added, your debt grows, even when you don’t purchase anything else. And most families DON’T pay more than the minimum each month. In fact, more families and individuals than ever before are finding themselves unable to meet even the minimum payment. How did this happen?

There are several reasons for this. Some are our own fault and some are the fault of the credit card companies, but the end result, either way, is lots of families drowning in credit card debt. Let’s look at some of the ways this debt accumulates.

First, credit card companies are eager to loan you money by establishing a credit card account with you. That’s how they make money. New grads and college students receive numerous offers to get the latest credit cards, often with the fabulous design of their choice, at a fantastic low rate, (perhaps even interest-free for the first 90 to 180 days). What those new users don’t pay close attention to is how that low or free interest rate will JUMP, often to 15%, 22% or even 29%, after the honeymoon period is over. With the new-found freedom to buy, buy, buy, with no interest rate or penalties, instant gratification becomes ingrained. It just gets easier and easier to spend money without really feeling like you’re spending money. And by the time that interest rate kicks-in, you already have the card maxed-out, or nearly so.

Instant gratification isn’t an affliction of only new card holders. Many people who should know better run their credit card debts up to the MAX, then get a second, third, fourth or more, simply so they can continue shopping on borrowed money, whether for necessities or for that momentary feeling of shopping pleasure and self-gratification.

A third way to get in trouble with credit cards is to not understand that those companies got you to sign on the dotted line that they could RAISE YOUR INTEREST RATE for any number of reasons. We had a credit card for 17 years, at a very reasonable rate - 7%. My husband, who always pays the bills, had a heart attack. While I was at the hospital with him for his open-heart surgery, I neglected to pay the bill within the agreed time because I was a ‘little distracted’. Our rate jumped to 29%, after seventeen years of a perfect payment record. That new interest rate, combined with the medical expenses of heart surgery, almost bankrupted us. It was a painful lesson and a scary close call but we learned some valuable lessons.

First of all, you need to take a cold, hard look at your spending habits. In this iffy economy, just ignoring the problem will not make it go away. If you are paying only the minimum amount each month, you need to recognize that YOU HAVE A PROBLEM. The smart thing to do is face the problem and GET HELP. Start by paying off the card with the highest interest rates first. When that card is at zero, start doubling-up payments on the next-highest interest rate, and so on.

It is very possible to contact the credit card company and negotiate a more favorable interest rate. Or, there are companies that can help you reduce your credit card debt, but as with everything, there are good ones and bad ones. Now that you’ve decided to straighten-out your financial life, take the time to research and get recommendations. Don’t just go for the glossiest ads or the biggest promises. And be very wary of debt consolidation loans. Yes, you can reduce all your bills into one easy monthly payment, but what will you do with the extra money? Will you use it to pay-off existing debt or start a savings program? Or will you spend the money on more ‘must have’ luxuries. Debt consolidation only works if you stop running up more debt in the meantime.

Whatever course you decide to take, be proactive. Don’t just dodge the phone calls and hope bill collectors will go away. They won’t AND your credit will be ruined. I repeat, GET HELP!

I’m not suggesting that you cut-up, or burn all your credit cards, but unless you can trust yourself to STOP charging, then perhaps you should get rid of them. I personally feel it is better to keep ONE credit card for genuine emergencies, but keep it where you can’t get to it unless you MUST!

Don’t be at the mercy of credit card debtors! TAKE ACTION NOW!