Avoid Recurring Debt To Take Control of Your Finances
One of the biggest debt traps out there is revolving debt. Credit cards have managed to indebt millions of individuals in the United States who took on lines of credit when debt was relatively cheap. Some had offers for introductory 0% cards, motivating them to indebt themselves further with the ideal that they would pay it off before the finance charge reset. Unfortunately, with revolving debt, it’s very easy to get in over your head. It’s not like a short-term loan, like pay day loans, that only allow you to borrow a small amount (between $300 and $600) and then requires payment with a short payback cycle, clearing the balance. Instead, revolving credit on credit cards can linger for years and cost many thousands of dollars more than it’s worth.
The Adjustable Rate Cards
Everyone knows an adjustable rate home mortgage is bad news, by this time. Yet, credit cards are built on the adjustable rate model, and terms for resetting can be as spurious as the lender deciding they want to do it “just because.” Many individuals who weren’t even late with their payments and held excellent credit scores saw their rates zoom to over 30%, with a limit on their credit lines, just because the banks felt insecure. There are no legal ways to stop this sort of lender abuse either, even though Congress is trying to address the situation.
Minimum Payments Take Years To Repay
In addition, the minimum payment required, while convenient, is set to keep the person indebted for many more years than is reasonable. It can literally take decades to pay off a balance using the minimum payment because of the compounding interest rate. Lose a job too, and you will have no way to pay the credit card company, although they will continue to lend to you, putting you further behind the eight ball. At some point, the house of cards caves in and consequences can be damaged credit scores, judgments, and liens for a balance that is over-inflated with interest and fees that are ridiculous by any standard.
Throw Away The Credit Cards
If you want to get out of debt, start by throwing out the credit cards. Pay down the balances, and use only forms of credit that aren’t going to indebt you forever, like short-term loans. It takes discipline and determination, but the payoff is that the money you earn is yours, instead of the lenders from there on out. You can manage your finances much easier, having fewer regular monthly bills, and the chances of over drafting become less. In some cases, if your credit card debt is ranging in the 30% or above range, it can pay to close out the account to get a lower interest rate. This will ding your credit, but it will also help you to retire the debt earlier. Another great strategy is to use a tax refund to pay back a credit card, thus freeing up monthly cash flow for other purposes and retiring the debt forever.
This entry was posted on Monday, September 7th, 2009 at 9:46 am and is filed under Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
