How Does Someone Spiral Out of Control with Their Credit Cards?
Nobody wants to be crippled by debt, so you would do anything not to fall into it, but it happens quite often than one would think and too easily — sometimes quickly.
There are two primary reasons why people fall into significant or near unrepayable credit debt – unexpected expenses and planned but reckless spending.
Unexpected expenses are those that strike you out of the blues and are perfectly understandable in some cases. They include such things as medical bills, home repairs, car repairs, unexpected travel, family emergencies, moving expenses, and cover for job loss.
But the top reason why most people get saddled with credit card debt is the predictable one – planned but reckless spending. For example, if you don’t have a proper budget in place, you are going to waste a lot of money on stuff you don’t even need such as an unnecessary gym membership, dining out when you can cook at home, and even paying others to do grocery shopping for you. All these can add up to a costly credit card debt you will take forever to pay.
Then there are two secondary reasons that only occur if you fail to have everything figured out before starting to present your credit card everywhere – failing to pay what you can and failing to keep your debt to credit ratio low enough.
With a credit card, you need to be responsible enough to pay your bills monthly in full so that you don’t accumulate additional expenses in interest payments that may prolong your debt.
The debt to credit ratio (sometimes referred to as credit utilization rate) can be described as the ratio that indicates the size of available credit currently in use (the balance of your credit card) compared to the overall amount available to you (credit card limit). FICO® suggests that anything below 30 percent debt to credit ratio is good for you.
One of the most important things you should consider is credit utilization especially if you want to escape from a debt hole since maxing out your credit cards tend to give you less flexibility in your cash flow. Also, it means you might be accumulating interest charges a bit faster than you are positioned to pay off your balance, especially if you have been making bare minimum payments.
How Much Credit Card Debt Is Out There in The United States?
It is also reckoned that up to 40 percent of Americans can’t service their credit card debts with anything more than the bare minimum, which means they should seek relief from their credit card companies. The COVID-19 pandemic seems to have worsened the situation – almost one-quarter (or about 23 percent) of cardholders in the country have increased their credit balance in the last year as a result of the pandemic. Millennials are the worst hit by the pandemic, 1 in 3 (or 34 percent) of which have sunk deeper into credit card debts. But why have millennials had it so hard? It’s partly because they have already faced two recessions during their short career arcs, something that has negatively impacted their employment and saving prospects.
Nearly half (47 percent) of the adults in the United States, or about 120 million individuals, currently have significant credit card debt – that’s up from 43 percent reported at the start of March 2020, according to a report released by CreditCards.com.
What Are Your Options to Control Mounting Debt?
The best thing you can do to contain the situation is to realize it early enough and then begin to cut back on your expenses. There are numerous other things you could do:
- Pay your bills on time
- Pay more than your company’s recommended minimum payment
- Use the debt strategy to settle your debt (they are many – the snowball method, the “do what you easily can” approach, and the avalanche method)
- Talk to your credit card company and negotiate a reasonable reduction in interest rate
- Revaluate your spending habits
- Know your budget
And If Your Debt Ends Up in Collections, What Do You Need to Know?
The first notification you receive from the debt collection agency shouldn’t scare you into making rushed or regrettable decisions. You can negotiate the debt. After all, the debt collection agency or credit company wants their money back, and they know you are stuck, so they might be willing to talk about a new repayment plan or a lump-sum payment. Before you even start to negotiate though, look over the amount of debt you can settle in a certain number of months or in one time. Thereafter, propose the specific amount of money you can afford to pay. Also, be sure to know who to give the payments to (between the collection agency and the credit card company).
Also, note that you are protected by the FDCPA Act of 1977 (Fair Debt Collection Practices Act) which governs all debt collection practices at the federal level. The FDCPA basically prohibits debt collection agencies from using deceptive, abusive, or unfair practices to collect the money you owe them. This means the debt collection agency or whoever your creditor will contract to collect the money on their behalf, must adhere to the FAIR DEBT COLLECTION PRACTICES ACT. It is important to note that any State law having to do with debt collection overrides any federal guidelines outlined in the FDCPA.
When a debt is in collections there are two types of accounts.
Debt Purchaser – They buy debt for pennies on the dollar (.30 to .40) so it’s easier to negotiate with. Example; someone who owes $3000 but the debt purchaser buys it for $900 to $1200 that means you have up to $1800 to negotiate with.
Hired to Collect – There are collection agencies that are hired to collect credit card debt which means anything below what they are authorized to do has to go back to their client for approval.
Is Bankruptcy a Solution? What Are the Pros and Cons? And If a Consumer Consolidates or Gets Help from A Company Promising to Negotiate On Their Behalf, Who Are Those Companies and Are They Legit?
With chapter 7 bankruptcy (the only bankruptcy documents you could file as an individual), you get a chance to begin all over again on a clean slate for your credit debt. You will be able to eliminate or discharge your debt. Most credit card transactions are unsecured, meaning the debt is not backed with collateral that would’ve been claimed by your creditor in event of default. With the bankruptcy filing, your credit card debt may be erased. Once you file for Chapter 7 bankruptcy, all debt collection efforts by anyone will cease.
Chapter 11 on the other hand is a reorganization plan of debts owed by the consumer or a business to pay back most of the debt to their creditors. During this time creditors can not pursue any collection efforts against the consumer while under the reorganization plan. If the consumer or business fails to honor their payments, the courts can dismiss the case and creditors are free to go after the consumer or business once again.
To an individual, bankruptcy has two major setbacks. Firstly, your good credit will likely be hit, albeit temporarily. Secondly, they will look at your income before they permit you to file for bankruptcy – forget about it if your income is high enough to service the debt. Although rich people always seem to find a loophole in the system. Bastards!
There are also debt settlement companies which offer their services to negotiate on your behalf after a certain amount of money is deposited into a savings account they control. Most of the time they try to settle for pennies on the dollar, but the draw backs are that there is no guarantee your creditors will accept a lower amount to settle and your credit will likely take a bad hit while the DSC you hired is negotiating on your behalf. The more money they save you works in their favor because they charge you a percentage of those savings for their services.
So How Does Someone Avoid Getting Back Into Debt After Resolving Their Finances?
It’s simple: start by paying all of your balance accounts every month. If you start with zero balance every month, you can almost be sure to eliminate the chances of falling back into debt. Secondly, be responsible and watch your spending with credit cards – only use it when necessary.
If you cannot afford an item without the help of your credit card, then you probably shouldn’t buy it and avoid sliding back into debt. Also, start thinking about cutting out the wants and focus on your pressing needs instead.
Maybe it’s time to cut on the number of credit cards you have. If there are more than one card in your possession, try to get rid of extra cards to improve your chances of controlling your expenses more effectively. You don’t need more than one card – think about it.
If you have a habit of using your card for all cash advances, it’s time for you to stop. Also, there’s no shame in saving a few bucks by collecting coupons. You stand to save a fortune by taking advantage of such offers in every instance you see them.
Times are hard. With many people trying to get back on their feet after the pandemic, it’s about time you start to watch your spending. One of the areas you need to watch is how you use your credit card(s). It can take just a few spending moves to put you back into debt with your credit card company.
Note: If you are in financial trouble and are looking for a list of reputable non-profit debt relief agencies, please click on this link for help: https://www.debt.org/credit/counseling/agencies.