Causes and Cures Of Credit Card Debt
For some, credit cards can prove a temptation too far, and soon they find themselves in debt. Simple precautions will keep the savvy card holder from such dangers.
Missing Payments
The fastest way to get into credit difficulties is by not repaying the minimum payment required, typically, 2.25% of the balance or £5, whichever is less. Missed payments may result in the card being refused at retailers until payment is made. Worse still, this will affect the user’s credit rating. The solution is simple; set up a Direct Debit for the minimum amount and pay off as much of the remaining balance as possible to keep the debt low.
Spend, spend, spend
In fact, don’t, don’t, don’t. Spending on a credit card is borrowing money. It is a debt and must be repaid at some point. The smart card user only uses the card in place of cash, or to obtain a purchase they can afford, if they can pay off the cost over time. In other words, the smart card holder only spends what they can afford.
The end of the honeymoon
Every special offer must come to an end, from 0% balance transfers to low introductory interest rates. When the special rate ends, the interest rates shoot up, and a small debt can grow rapidly, particularly if only the minimum repayments are being made. There is no point in being loyal to a card that has outlived its special rate; pay off the outstanding balance, or transfer it to a 0% balance rate, and get a new card with a lower rate for purchases. Make a note of the expiry date of all special deals, and move cards a month before this, to make sure all transactions go through before interest becomes due.
A Fistful of Cards?
Never hold more than eight cards at any one time, as this will adversely affect credit ratings. Clear any outstanding balances and cancel (in writing) cards that are no longer used. Police advise shoppers to only carry one card at a time to reduce the risk should their card be stolen.
Payment protection
Some cards offer payment protection insurance, but premiums are often high and the conditions of payout complicated. The best insurance against inability to pay is to pay as much as possible, as regularly as possible, and limit unnecessary spending. If a card is too tempting, only take cash when shopping. Once the cash is gone, stop shopping!
Stop debt growing
If debt is growing, there are four things card holders can do immediately:
- Move debts to the lowest interest rate available. Remember, a card holder with a good credit rating can always ring and ask the credit card company for a lower rate at any time.
- Prioritise paying off the most expensive debt first, so interest is kept to the minimum.
- Assess their situation fully, work out their income and expenditure, and total their debts and assets.
- Take this information to a professional body offering free debt advice.
If the money runs out
If a card holder is having major difficulties making repayments, say after losing their job, their first port of call should be the credit card company. Companies would far rather help at this stage than when the situation has escalated. Card holders can discuss freezing the card (and perhaps even the interest rate) and paying off the debt at an agreed amount each month, for example. Card companies are surprisingly willing to help in cases of genuine difficulty, but this will involve major budgeting and belt-tightening by the card holder. Then they should consult a professional.
Get professional help - NOW
There are plenty of debt consolidation firms offering to help, but do bear in mind these companies ultimately make money from a card holder’s debt. There are four main agencies that offer free, impartial advice for those in debt: the Citizens Advice Bureau, the Consumer Credit Counselling Service, National Debtline, and Payplan. These are non-profit making organisations that guide those in debt through the options available to them.
Consolidation Firms
These firms advertise frequently on TV, but remember, they are in business to make money. Their advice may be free, but their interest rates certainly are not. Despite their claims to write off up to 70% of the debt, this might be at the expense of securing a property against a credit card loan. Card holders in difficulties should assess their own situation fully before consulting a firm, so they are fully aware of the implications of any proposed loan arrangement. They should also visit one of the free debt advice services. Consolidation is NOT a way to get debts totally written off. Also, such loans may affect future credit applications, as in effect, this loan is simply borrowing money to pay off a debt.
Drastic action
When debt has got out of control, the two major options are an individual voluntary arrangement (IVA), and bankruptcy. NEVER consider these without consulting the free debt agencies and/or a professional insolvency practitioner first. These are serious actions with wide-reaching consequences for future credit applications of any sort.
More Information:
BluePink 
