| Understanding Credit card Debt |
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Understanding Credit Card Debt
Most of us are familiar with credit cards. As mentioned earlier, U.S.
Statistics show the average family has a credit card balance in excess of
$4,000, and pays around $800 a year on credit card interest. In fact,
credit card debt accounts for a very sizeable chunk of total consumer
debt, which in the U.S. is about $1.5 trillion. This translates into roughly
$19,000 per household. Clearly credit cards are an important part of our
day-to-day lives, which is why it’s important for consumers to understand
the effect of that interest on them.
Most people don't CHOOSE to pay a high interest rate. The bank decides
what interest rate it will charge you based on how much of a 'credit risk'
you are perceived to be. They determine that by looking at your history of
paying bills. If you've got a history of paying bills on time, then you'll
qualify for lower interest rates. If you haven't ever had any bills to pay, or
if you've had trouble paying your bills, that will show in your credit history,
too. Since it's a little riskier to lend you money, banks will charge a higher
interest rate. Without a history of paying bills or credit payment they
consider you to be a higher risk. In other words you will not receive the
benefit of the doubt.
The "minimum monthly payment" is the smallest amount you can pay and
still be a card holder in good standing. Banks often encourage you to
make the minimum payment, such as 2% of your outstanding balance or
$20, whichever is less. Don't forget the banks are in it for the money and
are looking for the interest they charge on outstanding balances.
Most of us are familiar with credit cards. As mentioned earlier, U.S.
Statistics show the average family has a credit card balance in excess of
$4,000, and pays around $800 a year on credit card interest. In fact,
credit card debt accounts for a very sizeable chunk of total consumer
debt, which in the U.S. is about $1.5 trillion. This translates into roughly
$19,000 per household. Clearly credit cards are an important part of our
day-to-day lives, which is why it’s important for consumers to understand
the effect of that interest on them.
Most people don't CHOOSE to pay a high interest rate. The bank decides
what interest rate it will charge you based on how much of a 'credit risk'
you are perceived to be. They determine that by looking at your history of
paying bills. If you've got a history of paying bills on time, then you'll
qualify for lower interest rates. If you haven't ever had any bills to pay, or
if you've had trouble paying your bills, that will show in your credit history,
too. Since it's a little riskier to lend you money, banks will charge a higher
interest rate. Without a history of paying bills or credit payment they
consider you to be a higher risk. In other words you will not receive the
benefit of the doubt.
The "minimum monthly payment" is the smallest amount you can pay and
still be a card holder in good standing. Banks often encourage you to
make the minimum payment, such as 2% of your outstanding balance or
$20, whichever is less. Don't forget the banks are in it for the money and
are looking for the interest they charge on outstanding balances.
If you only pay the minimum, it can take years to pay off the debt, and you will pay a lot more interest than you may think .
Suppose you owe $2,000 on a card with 19% interest and a 2% minimum payment. Paying just the minimum every month, it will
take you 265 months -- over 22 years -- to pay off the debt, and it will cost you nearly $4,800 in interest payments.
If you don't pay anything, or pay less than the minimum, you will be charged a late fee. In addition, there may be a negative report
to credit bureaus. That report could affect your ability to obtain credit in the future. This of course could be a blessing in disguise
if you have trouble managing your credit.As wonderful a tool as credit can be, it is a big responsibility that can lead to financial
trouble if not managed properly.
Don't
Do's
Repairing your credit history
Many companies market the ability to help "fix" your credit. These services can be costly and ultimately, it may be impossible to
erase most derogatory information in less than seven years. The best way to repair your credit is to work with your creditors to
pay down your debt and manage your credit accounts responsibly. In time, you'll re-create a new credit history that you can feel
confident about.
Addressing credit issues can be uncomfortable to say the least. But by taking these steps now, you’ll be that much closer to
obtaining the home of your dreams.
Suppose you owe $2,000 on a card with 19% interest and a 2% minimum payment. Paying just the minimum every month, it will
take you 265 months -- over 22 years -- to pay off the debt, and it will cost you nearly $4,800 in interest payments.
If you don't pay anything, or pay less than the minimum, you will be charged a late fee. In addition, there may be a negative report
to credit bureaus. That report could affect your ability to obtain credit in the future. This of course could be a blessing in disguise
if you have trouble managing your credit.As wonderful a tool as credit can be, it is a big responsibility that can lead to financial
trouble if not managed properly.
Don't
- Don't be tempted to sign up for a card only on the basis of the loyalty or rewards scheme
- Don't blindly use store consumer credit cards because its offering 12 months interest fee - beware the interest rate may
bite you if the debt is left unpaid. - Don't give you credit card number as a form of ID or to somebody unless you're buying or making a reservation.
- Don't make too any cash withdrawals from a credit card, as charges may be higher for these direct transactions.
- Don't be tempted to increase your credit limit and build up even greater debts
Do's
- Pay off the balance on your credit card each month
- Shop around for competitive interest rates credit cards
- Be aware of your credit limit.
- Use an Oil company credit card for gas - you're limiting the possibility of fraud to its limits and use.
- Remember to immediately cancel to card if lost - you can have it canceled on a temporary basis and reactivated later.
- Keep a record of any transactions and keep receipts until your statement arrive
Repairing your credit history
Many companies market the ability to help "fix" your credit. These services can be costly and ultimately, it may be impossible to
erase most derogatory information in less than seven years. The best way to repair your credit is to work with your creditors to
pay down your debt and manage your credit accounts responsibly. In time, you'll re-create a new credit history that you can feel
confident about.
Addressing credit issues can be uncomfortable to say the least. But by taking these steps now, you’ll be that much closer to
obtaining the home of your dreams.