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7 Credit Card Traps You Should Be Careful With

credit card trapHave you ever been in credit card hell? This is a financial state when you realize that your credit cards are not really doing you any good. It is when you are put in a situation wherein you have been sucked into one of the credit card traps that is keeping you buried under loads of financial obligations.

What makes this debt easy to fall into is the fact that you can use it over and over again. It is not like the traditional loan that you apply for once and when you have used up the funds, you have to apply again to get more money. A credit card allows you to use it again and again – that makes it a dangerous habit to get used to. If you are not careful, you could end up burying yourself under a mountain of debt.

In fact, TIME.com reported that the current debt of Americans have reached really high amounts already – scary high rates to be exact. That is how the article described it. They cited data from the Federal Reserve Bank of New York that the current debt is not as $11.52 trillion. It is an amount higher than it had ever been since 2011. Not only that, the article said that it is still rising quite rapidly. The debt increased by $241 billion during Q4 of 2013. That is the highest growth with 2007 – which was the start of the most recent recession.

Does that mean we have to brace ourselves for another financial crisis? That all depends on how we act now.

7 credit card qualities that double as a financial trap

One of the things that you can do is to avoid the tricky debt pitfalls that can ruin your financial situation. In particular, you may want to be a smart credit card user. That begins by learning the credit card traps that will put you in danger of too much debt. Here are the 7 qualities of a card that you need to be careful with. If you do not know enough about them, they can end up putting you in debt.

  1. Minimum payment requirement. The first is about paying only the minimum of your debts. If you compute it, you will realize that it will take you a lifetime (sometimes literally!) to finish paying off your credit card balance in full. That is because the minimum payment requirement is only around 4% of your balance. The rest are finance charges. If you want to significantly reduce your debts, you have to learn how to pay more than the minimum.

  2. Late payments. Another one of the credit card traps that you need to be cautious of are late payments. This is not just the $25 to $35 charge that you will be paying on top of your balance and finance charge. It can also include the APR (Annual Percentage Rate) penalty that you will be imposed with until after you have made 6 payments on time.

  3. Payment processing schedule. In line with number 2, you need to be aware of the specific schedule of your payment cut off. It is usually in the afternoon of your due date. If you sent in your payment even a minute late, that can trigger the late payment fee. You can call the credit card company to waive this penalty fee so that you will not be charged – at least, if you have been late for only a minute or a day. But if you know that you are going to be late, you may want to call your creditor immediately to ask for an extension.

  4. Introductory fixed interest rate. The law allows credit card companies to change your APR anytime they wish. They only have to give you advice ahead of time. Sometimes, credit card companies will offer a fixed interest rate on new accounts but do not be blinded by that. In most cases, that will change after the first year is up. Make sure you are aware of that before signing up for the card. Ask when the new rate will take effect and how high it will be.

  5. Balance transfer. Credit card traps also include the debt relief option known as balance transfers. It is true that a balance transfer can help you get debt relief but you have to understand the rules first. This is a new card that is offered with a 0% interest rate. This is only for a specific period – usually between 6 to 18 months. After that, your rate will change to the usual high interest rate of credit cards. Unless you can pay the credit card debt completely within the promo period or at least a significant part of it, this debt solution will not help you a lot.

  6. Cash advance. Be careful of cash advances in credit cards. While this can help you during emergencies, it will be imposed with very high rates. If you cannot pay it back immediately, it can accumulate quite easily. Try to search for other options to finance your need. Credit card cash advances should be one of your very last options – along the same level as payday loans.

  7. Reward programs. The last of the credit card traps that you may want to be careful with are the reward programs. If you are only getting the card because of the rewards, you need to come up with a better reason than that. Also, you may want to maximize these rewards to benefit from the card.

These credit card traps can put you in debt if you ignore them. Make sure you pay attention to them so they will not become pitfalls.

How Americans use their credit cards

Although these traps will endanger you to fall into credit card debt, the main blame will still be on your own spending habits. It is just in our culture to be spenders. In fact, the US economy relies heavily on consumer spending to thrive. That being said, you can expect that the government, businesses and everything around you will be encouraging you to keep on spending your money.

Based on an infographic from The Credit Examiner, the credit card usage statistics reveal that in 2012, Americans spent their credit cards on the following:

  • 81% on travel expenses

  • 77% on expensive purchases

  • 46% on personal items

  • 44% dining out

  • 38% on groceries

  • 37% on entertainment

  • 20% on household bills

  • 15% on small expenses

Source: http://www.thecreditexaminer.com/2012-us-credit-card-usage-statistics-infographic/

Most of the expenses here are actually unnecessary, if you think about it. In another infographic, The Credit Examiner showed some interesting statistics and facts about overspending in the country. Apparently, in 2012, the picture of consumer spending are as follows:

  • 52% of consumers are spending beyond their means.

  • 21% of them have monthly expenses that cannot be covered by their income.

  • 13.5% of consumers are forced to alter their budgets to accommodate the overspending of the previous month

Source: http://www.thecreditexaminer.com/overspending-in-america-statistics-and-facts/

According to the last infographic, some of the reasons why consumers are overspending is because they do not have monthly saving goals. Another reason is they can easily access credit and cash. It is also noted that a lot of us misuse our credit cards.

It is apparent that managing multiple credit cards without ending in debt is a huge challenge for all of us. But you do not have to get rid of these cards if you do not have to. You just have to learn how to use it wisely.

Here is a video from National Debt Relief for more tips on how to solve credit card debt problems.

Facts About Credit Scores and Credit Cards That Might Surprise You

man holding multiple credit cardsIf you’re like us you probably take credit cards pretty much for granted. They are nice little pieces of plastic that you can whip out whenever you don’t have enough cash to pay for a purchase or when you’re running a little short and it’s not yet the end of the month. If you’re a savvy credit card user you don’t charge anything that you can’t pay off when your statement roles in so you never pay any interest charges.

The top cards

Have you been tempted to sign up for one of those cards that offer mouthwatering rewards. The top ones come with significant rewards from 2% to 5% cash back. Some even offer 0% interest for an introductory period of time. However, what these credit card offers don’t tell you is what it takes to qualify for one of them.

The credit card companies have criteria called “underwriting standards” for their cards that are closely guarded secrets. The credit card companies are much like Coca-Cola that refuses to release its recipe for Coke. The credit card providers keep secret the criteria they use to approve applicants for their most exclusive cards. However, there is information available from the site CreditKarma that provides insight into what it takes to get one of those top rewards cards. CreditKarma recently released a list of the lowest and average credit card scores of people who had been approved for some of the best and most exclusive credit card offers.

Fact #1: You could have a score in the 600s

The first surprising fact that can be gleaned from this information is that you don’t have to be a member of the “700 club.” In other words, you don’t necessarily need to have a FICO score of 700 or above to qualify for one of the top cards. While the average credit scores for people who successfully obtained the top cards did range in the low 700s, the lowest approval scores dipped well in the 600s. This is clearly because other factors are considered such as past payment history and income. This helps explain why the top credit cards from companies such as Citi, Barclaycard and Discover went to applicants with scores in the 600s.

Fact #2: 0% interest cards require a top score

A second surprising fact is that those 0% interest balance transfer cards do require a top credit score. If you’ve checked into the cards currently available, you would know that the top offer is for an 18-month introductory period. The irony is that these credit cards might be designed to help people trying to get out of credit card debt but the best ones do require a top credit score. For example, Discover and Citi are granting their 12- or 18-month cards only to people who have average scores in the low to mid-700s. If your credit score is in the mid 600s, the best you will probably be able to qualify for is one that lasts just six months.

Fact #3: Higher scores get better rewards

A third maybe not-to-surprising fact is that the higher scores get the bigger rewards. The best of these cards usually offer 2x points, cash or miles on almost every purchase. As you might expect, the average credit score required to get these cards is markedly higher than a “good” credit score. As an example of this, one version of the Barclaycard Arrival World Master Card offers 2x miles on all purchases and significant bonus miles, too. However, successful applicants for this card had average credit scores of nearly 740.

Fact #4: Students can have lower scores

Here’s one you might definitely expect, which is credit cards for students require much lower scores. In fact, the available credit score data shows that the average scores for applicants who are approved for these cards fall below 700. And the lowest scores that are approved for student cards are in the low 600s and, in some cases they even fall below 600.

Fact #5: Approval is just the start

If you are approved for one of these top credit cards this is just the start. Your credit limit and interest rate will be calculated based on your credit scores and other underwriting criteria. If you have a high score you will have higher limits and lower rates.

Something to keep in mind

If you do apply for one of the top rewards cards keep in mind that credit score information is just one factor in the card provider’s underwriting criteria. Plus, as card issuers fine-tune their underwriting standards, these criteria continually change – especially as the prime interest rate changes.

The downside of credit cardscouple worrying about finances

It doesn’t really matter much the rewards you could earn from a credit card if you’re continually racking up debt. You might think that getting 2x cash back on your Visa or MasterCard is a really good deal – but that’s only if you’re paying off your balance at the end of each month. If not, you could be racking up interest charges at the rate of 19% or even higher, which would totally wipe out those cash back rewards. The credit card companies have a grace period of anywhere from 25 to 30 days where you can pay off your balance before you begin to get hit with interest charges. If you charge a purchase the day after your card has “rolled over,” You might get nearly 2 months before that charge would come due. That’s like free money.On the other hand, if you don’t pay off your balance before or on the date it’s due, you will start piling up interest charges and could end up spiraling into a black hole of debt. Here’s an example of what we mean. If you charged $5000 on credit cards that had an average interest rate of 19% and made only the minimum monthly payment of $125, it would require roughly 273 months to pay it off (nearly 23 years) and would cost you $6,923.14 in interest charges.

If you get into credit card debt

If you’re getting to the point where you’re making late payments on your credit cards or even skipping payments, there is a good solution. It was developed by a financial expert named Dave Ramsey and is called the “snowball” method for paying off debt. The way it works is very simple. You rank your debts in order from the one with the lowest balance down to the debt that has the highest. You then concentrate on paying off that first debt being sure you continue to make the minimum payments on all your other debts. Once you have that firs card paid off, it will be easier to off the card with the next lowest balance and you will have more money available, then on to the third debt and so on.

Here’s a short video where Dave Ramsey explains more about why it’s important to get out of debt and   his snowball method.


Alternately, you could do as other financial experts counsel and arrange your debts from the one with the highest interest rate – which is costing you the most money – down to the one with the lowest. You would then focus on paying off the one with the highest interest rate then move on to the one with the next highest interest rate, etc. There are people who believe strongly in one or the other of the strategies but what it boils down to is choosing the one that makes the most sense to you.

5 Credit Card Uses That Are Actually Smart

retailer cutting a clients credit cardCredit cards have gone through a lot of bad publicity in recent years. But despite that, you should know that there are smart credit card uses that will defend their existence in the financial industry. They really have uses that are beneficial to our finances – from the convenience of a cashless transaction to the extra layer of protection for your money.

But of course, we need to learn how to use a credit card responsibly to be able to enjoy all of these benefits. If you think about it, we are to blame for our credit card problem. The card itself is not flawed. Everything boils down to how we choose to use it and how we react to the payment obligations that are expected of us after every use.

Although we are encouraged to lower our debts, statistics show that our debts are still continuing to rise. According to the latest data from the FederalReserve.gov, the total debt amount by the end of 2013 is now at $3.1 trillion. Credit card debt (included in the revolving debt category) has also risen significantly in the last quarter of 2013. In quarter 1, the revolving debt is at $849 billion. In quarter 2, it grew to $851 billion and then increased to $852  billion in quarter 3. It jumped to $861 billion by the end of the the year. Most of the growth happened in December – just as expected because of the holiday spending.

These trends show us that paying off the debt completely still involves a very long journey ahead. It is advisable that you pay off any balance that you have before you decide on any more credit card transactions in the future.

5 uses for your credit card that makes sense

Despite these, did you know that there are certain credit card uses that actually make a lot of sense? If you consider it carefully, it even makes better sense than using cash – at least, if you learn how to pay the balance properly. Here are the 5 ways you can use your credit card the smartly.

Making online purchases.

Online shopping has grown to be a very convenient way to make purchases. It beats going to the store and fighting your way through the crowd just to get what you want. In some cases, the online prices are even lower than their counterpart in the store. Statistica.com reveals an increasing trend in online shopping. In 2010, the number of online shoppers were 172.3 million who contributed $228 billion in the overall consumer spending. In 2011, it grew to 178.3 million e-shoppers who spent $256 billion. In 2012, it grew even further with 183.8 million online shoppers who spent $289 billion throughout the year. Although the figures are not yet final, it is estimated that the 2013 online shoppers will total to 189.4 million. This growth will push eCommerce shops to improve their products and services – and that makes it an ideal place to buy things. If you want to join this trend, your credit card will help protect you and give you benefits too. Things like unauthorized charges can be reversed and thus protecting your money. You can even expect a stronger return and warranty policies – thanks to your credit card account.

Paying for big products or electronic appliances.

One of the options for credit card uses is for big and expensive purchases that takes too long to save up for. If the appliance or furniture really needs to be replaced and you cannot wait to save up for it, it is okay to use your credit card. But there are some things that you need to do. First is to check the warranty clause in your card. Most credit card companies offer extended warranties. Also, you may want to check if you can avail of a zero% installment plan to pay off that debt.

Renting a vehicle.

It will be very difficult for you to rent a car without a credit card. After all, this is the guarantee of the company that you will not run off with their car. While there are very few rental companies that will allow you to do so without a card, they will place a $500 hold on your bank account for 14 days. It will also involve a credit check. All of these will be unnecessary if you have a credit card. That convenience does not have any other alternative.

Financing your travel expenses.

Card holders can also benefit from this purchasing tool during vacations or other travelling events. In case your card gets stolen while you are away, you can simply call the creditor to ask them to freeze your account. That will keep the thief from completely stealing from you. Some cards also offer you travel insurance. In case you lose your card, there are companies who will send you cash and quickly replace your card within 24 hours. There are also certain travelling perks that you can enjoy.

Booking hotel accommodations.

Renting hotel rooms wrap up our list of great credit card uses. Just like in rental cars, booking a hotel room with cash will allow hotels to put a hold on your bank account. For some establishments, they will hold the amount that you are expected to pay for throughout your stay. That includes the room rate, phone calls, taxes and other incidental costs. It can cost up to $1,000 or more. And even if you pay it in cash at the end of your stay, the hold will not be lifted immediately. So if your expected bill is $1,000, you need more than $2,000 in your bank account.

All of these expenses are better off using a credit card but remember that you still have to practice being a smart credit card user. Make sure that you have a plan in place to pay off your card balances so it will not accumulate and become a big financial problem for you in the future.

Using your credit card for emergencies is not too smart

Some financial experts will advise you to keep your credit card for emergencies. While this may seem like a sound advice, you have to approach it with caution too. It is still important for you to save up for a cash emergency fund to be your main source of financial support.

Despite that, there are two emergency credit card uses that are acceptable.

  • When your emergency cash fund is inaccessible. There are instances wherein there is no ATM around or other sources for you to withdraw your cash fund. This is the only time for you to use your credit card. When you finally have access to money, you may want to pay off your card balance immediately.

  • When your cash emergency fund is not enough to finance what you need. Sometimes, your emergency situation demands a huge amount of money. If your cash fund runs out, your credit card can be a welcome relief. This will help ease your worries as you try to get out of your financial difficulty.

These are the only time that you should consider using your credit card for emergencies. It should not be an excuse for you to not save up for your emergency fund.

Credit card uses, regardless if it is advisable or not, should always be approached with a plan. With the exception of the emergency situation, you have to keep your card expenses in your budget. That way, you can pay it off as soon as possible to minimize, if not eliminate, the finance charges that can grow your money.

14 Signs That You’re Headed For Big Trouble With Debt

woman looking at billsUnless you’re one of that well-to-do one percent, chances are that you’ve gotten off track with your finances at least once in the past 5 to 10 years. You have good intentions to not let this happen again so it’s important that you can recognize the signs that you may be headed for a personal financial disaster. That way you could get back on track before it’s too late.

Here are 14 signs that you may be headed for trouble

1. Not paying your bills on time. One of the first signs that you may be headed for trouble is if you are unable to pay your bills on time. There are several reasons why this is important, not the least of which is the damage it does to your credit score. That little three-digit number rules your credit life in an inverse ratio. In other words, the lower your score the higher the interest rates you will be charged. For that matter, if your credit score falls below 580 you could even be forced to pay more for your auto insurance, your rent and even your utilities.

2. Struggling to just make the minimum payments. The minimum payments on your credit cards are just that – the minimum that you can pay to keep from being charged late fees. If you’re having a problem making just the minimum payments this is a sign that you are headed towards serious financial problems. Plus, it will take you much longer to get out of debt. As an example of this if you owed just $5000 at 19% interest and made only a minimum payment of $125 every month, it would take you roughly 273 months (nearly 23 years) to pay back the $5000 and would cost you $6,923.14 in interest.

3. Using credit cards to make payments. If you’re doing this, it’s the ultimate borrowing from Peter to pay Paul. Don’t fool yourself. When you do this you’re just piling debt on top of debt. The one exception to this is if you were to transfer all of your balances to a 0% interest balance transfer card. This would give you a sort of timeout period of anywhere from 6 to 18 months. During this introductory period of time all of your monthly payments would go towards reducing your balance instead of paying interest. If you could heavy up on those payments you could actually be debt-free before your introductory period expired.

4.Taking cash advances. If you’re taking cash advances on a credit card this is not only a sign you’re having a serious problem with your finances but is probably costing you big money. This is because almost all credit card companies charge you a much higher interest rate on cash advances than on purchases. Next time you get a statement from one of your credit card providers check the interest you’re paying on purchases versus cash advances. The odds are that cash advances will have an interest rate that’s at least 10% higher than on purchases.

5. Being refused for credit. When you apply for any type of credit, the first thing the lender will do is check your credit score to see how much of a risk you represent. If you have a low credit score and a credit report filled with late or missed payments this tells the lender that you are a very poor risk When you’re turned down for credit it’s because the lender believes that you won’t be able to pay back the money. This is a very serious red flag.

6. Earning less than you spend. Have you ever sat down to compare your spending with your earnings? If you’re piling up debt it’s because you’re spending more than you earn. You can double-check this by calculating your debt-to earnings-ratio. The way you do this is by dividing your fixed monthly debts by your earnings. If you find you have a percentage of 40% or higher, you’re headed towards a financial cliff.

7. Reaching or going beyond your credit card limits. Thirty percent of your credit score is computed by taking the amount you owe and dividing it by your total credit limits. When you reach the limit on a credit card or exceed it, you may be denied more credit or other lines of credit. As an example of this if you had total credit card limits of $5000 and had charged up $2500 on them you would have a debt-to-credit ratio of 50%, which would be much too high. This, too, would have a very negative effect on your credit score.

8. Taking money out of your savings or retirement. When you take money out of your retirement account you lose the returns you would have earned had you left the money alone. And when you take money out of savings, you will have less available should you run into a financial emergency. Most financial counselors believe you should have the equivalent of at least three months of living expenses in a savings account to protect yourself against emergencies. When you drain down your savings account this puts you at risk for running into an emergency where your only option would be to add more debt onto your credit cards.

9. Continually paying late fees. If you find that you’re always paying late fees you are either not doing a good job of managing your money or you’re just lazy. When you’re late on just one payment your credit score could be reduced by as many as 50 points. This could drop you from having “good” credit to “bad” or even “poor” credit and prevent you from getting any new credit.

10. Juggling bills. This tactic may help you in the short run but not over time. When you start shuffling bills so that you can at least make the minimum payments on the “hottest” ones, all you’re doing is putting off the inevitable. This, too, will damage your credit score and end up costing you money.A pile of bills, checkbook, pen and calculator on the table to create budget

11. Counting on a windfall. Are you putting bills aside waiting for a big Christmas check from Aunt Jane, a bonus or a commission? This is like one of those storm-warning flags that alert sailors to bad weather. It’s a distress signal that financial problems lay ahead and that you’re about to run into a storm of debt.

12. Doing the old credit card hocus-pocus. These are the words often spoken by a magician when bringing about some sort of magic change. But there’s no magic change you can make with credit cards if you’re continually making late payments or worse yet, skipping some. The only “magic” that can help keep you from falling further into debt is to pay off your balances.

13. Fighting over finances. Couples that are not struggling with debt rarely have arguments over money. If you and your spouse or partner is constantly arguing over money, it’s because you’re having financial problems. A better solution than fighting over finances is to sit down, have a calm discussion about the problem and then make a plan for getting them under control.

14. Paying overdraft fees. You could be on the brink of financial disaster if you’re constantly paying fees for overdrawing your checking account. Whether you want to face it or not, this means that you just don’t have enough money to support your current lifestyle. You will rarely find pages will get you

If you see some of these warning signs

If you see only one of these warning signs, you’re probably not headed for a financial disaster in the next few months. However, if you see three or more of these danger signs it’s time to buckle down, get to work and make a plan for getting your finances under control – before you start hearing from debt collectors. Trust us when we tell you that debt collectors are in general not very nice people and if you fall into their clutches, they can make your life miserable.

How To Be A High Volume Credit Card User Yet Stay Out Of Debt

Credit cards superimposed ove moneyDo you put $10,000 or more on your credit cards each month? In theory, it should be really easy to manage that debt. All you have to do is pay off your entire balances on their due dates. I mean, what else do you need to know?

Unfortunately, the answer is that there is a lot more to know. Many people are simply not able to follow this system. In fact, Americans carry an average credit card balance of about $5000. It’s just not a good idea to carry a balance like this because your interest fees can quickly escalate the amount you owe. In addition, the monthly payments you would make on past spending may inhibit your ability to pay for your current expenses and save for the future. Fortunately, many high-volume credit card users have discovered how they can charge and pay off huge sums on their credit cards and always come out ahead. Here’s what they’re doing right.

1. Use software

Savvy credit card holders use technology to see where their money goes. If you don’t know exactly where it’s going and what it takes to run your household it becomes very easy to run up debt. There are numerous apps and software available to track your cash and credit flow to make sure you never overspend. Step number one towards financial well being is to know that you can pay off your credit card debt based on your regular usage and without it affecting your checking account balance or other areas of your financial life. If you want to be a successful high-volume credit card user, go online, check out personal-finance programs and find one you think will work best for you. We like Mint.com and You Need A Budget (YNAB) but some people prefer Quicken.

2. Earn when you charge

Ultra-sophisticated credit card users make money instead of paying interest by using credit cards rewards programs. The best of these offer straight up cash back. As an example of these, Target cards offer 5% cash back on purchases and an American Express card from Fidelity has a 2% cash back rewards program. The Fidelity card could be a good choice because for every $5000 you spend, Fidelity will deposit $75 into your investment account (if you have a Fidelity account). Many cards such as the Chase Freedom Card offer choices – you can either get rewards points or cash back. This card, like many others, also offers the opportunity to earn more cash back via quarterly promotions. For example, you might be able to earn double points by using the card at restaurants during a three-month period. If you play your cards right, you could maybe spend $20,000, get as much as $1000 back and then avoid any interest charges by moving your entire debt to one of those 0% interest balance transfer cards.

If you’d like to know more about the differences between cash back, points and airlines miles, here’s a brief video that answers this question.

 3. Be prepared for the inevitable

Expensive emergencies such as a broken-down car or an aging pet that requires surgery is what trips up most cardholders. These emergencies tend to feel like surprises because they exist outside ordinary spending. If you run into one of these and don’t have the cash in hand, it will have to go on a credit card –unless you’ve taken an extra step so that you are prepared for financial emergencies. What that extra step amounts to is setting aside money to pay for those inevitable emergencies. One good way to do this is to have a separate savings account with automatic deposits from your paychecks. While many financial experts say that you should have the equivalent of six months of living expenses put aside to cover emergencies, a more affordable alternative might be three months worth.

4. Have ongoing conversations about credit

Sitting down with your spouse or partner to discuss your credit situation is certainly not much fun and can lead to arguments. But savvy credit card users communicate with their partners or spouses continually to make sure they have his or her willing cooperation and participation. Don’t wait for problems to start but make credit discussions an everyday conversation, particularly if you and your spouse or partner have conjoined accounts. If you maintain a regular dialogue, you can avoid those “oops” of credit card life. For example, suppose you need a new $500 computer. That should be a joint decision as to whether you spend the money now and incur $500 in debt or save for several months so you can pay cash. The important thing is for the two of you to be able to agree as to how you are going to handle purchases such as this.

5. Commit to zero

A survey done recently revealed that 20% of Americans feel that it’s not only inevitable to carry over credit card debt but a responsible way to manage personal finances. If this is how you feel about credit, it’s time to change your viewpoint. The high-volume credit card users say that debt is not a fact of life and that the amiunt of your income is irrelevant. Pledge to borrow only what you know you’ll be able to pay back immediately and then follow through on it, no matter how painful it might be when the time comes to write a check. It really doesn’t matter how much you put on that credit card so long as you can pay it off in full and on time. If you buy only things that you know you can pay for at the end of the month, it tends to keep spending in check. This is made easy by the credit card companies that have their high interest rates and penalties. In fact, they make it seem absolutely foolish to not pay your bill in full or, worse yet, to miss a payment.

6. Pay early and oftenCheck

The vast majority of credit cards give you about a 30-day window to send in your payment. If you pay the entire balance owed you avoid any interest charges. Your statement(s) will have a due date and you need to make sure you know what it is. Savvy credit card holders actually pay as they go instead of waiting until the date their payments are due. For example, you could pay off your credit card balance every Friday and then start the next week fresh. In many cases if you pay often and in small portions, you’ll find this is easier than having to face one huge payment. Alternately, you could pay off your balance every paycheck, which is probably twice a month.

7. Lose the plastic

Most high-volume credit card users have streamlined their accounts to just a few cards. Multiple cards can lead to confusion. The more cards you have, the more likely it is that you will get into trouble. It’s probably better to have two or three accounts with large limits than a whole bunch of cards with smaller limits.

8. Respect your limits

It’s not important that your credit card issuer will let you charge up to $20,000. And what your friends are using their credit cards for is none of your business. The important thing is for you to know how much money you have and to not worry about what other people think. The people who most often get into trouble are those who buy things they can’t afford due to peer pressure. This means the critical number is not your credit limit but the amount you can afford to repay. The best solution is to focus on your budget and live below your means. Just about anybody can alter their lifestyle to do this and there’s no reason why you shouldn’t be able to do this as well.

Emergency Credit Cards? 6 Reasons Why It Is A Bad Idea

road signsNobody knows what the future brings and it is for that reason why we have to be very careful about preparing for it. Some people may think that you are being paranoid when in truth, you are just being cautious. It is also being practical because there are many disadvantages of being unprepared for an emergency. When we say unprepared, we are mostly talking about not being ready financially.

In most cases, an unexpected event comes with a financial need. Whether it is an accident, an illness or any other requirement in your personal or work life, it usually requires you to pay a certain amount to get over it. If you are not prepared, the chances of you being in debt is very high. Instead of solving the problem entirely, you have just immersed yourself into another financial emergency.

This is where most people turn to emergency credit cards. Their inability to pay for emergencies in cash made it alright for them to use credit cards. While it may seem logical to do so, you have to understand that it will actually do you more harm than good.

6 ways that using a credit card for emergencies is a bad financial choice

In an article written by Dave Ramsey in his website, daveramsey.com, he revealed an important truth about credit cards. He said that cash is better to use because you have an emotional attachment to it. That mean you will be more cautious in using it. When you use credit card, Dave Ramsey said that you are more likely to spend more because you do not feel the parting with your money. In fact, his article cited a McDonalds study that revealed how consumers usually spend 47% more when they use credit cards.

Even if you are using emergency credit cards, it will still work the same way. You will still experience a detachment when you pay for that emergency expense. But beyond that, here are 6 reasons why it is a really bad idea to use credit cards for emergencies.

  • A credit card is a loan. Do not think that just because your credit card is under your name, you are using your money. That is what makes people overspend through their credit. You have to understand that this is not an extension of your wallet. Every payment that uses your credit card is actually using the money of the creditor. You are just borrowing money. That means when the whole crisis or emergency situation is over, you have yet to deal with the payments of your credit card bills.

  • You can put yourself under so much debt. As mentioned in the Dave Ramsey article, credit will make you spend more. If you cannot pay for  your dues immediately, your credit card balance will incur finance charges. That will make your debt grow until you have paid it off completely.

  • You will not feel the need to look for alternatives to finance your situation. Since the credit card will make you feel like you have sufficient funds, you will not feel the need to look for alternatives to lower the cost you need to pay for. You have to understand that looking for better options should be a priority – regardless of how you intend on paying off the unexpected expense. You will not feel the need to approach charitable organization or similar companies that have programs to help you out.

  • Even emergency credit cards can be closed due to inactivity. You may be wondering why this is an issue. An emergency cannot be predicted. That means you can go for a long time not having an emergency. If that happens, you can have your credit card closed due to inactivity. These cards are usually automatically cancelled when there is no activity within 6 months. If you are not aware of this and something does happen, you may find yourself really unable to pay for that financial need – both card and cash.

  • Emergencies can strike one after the other and that can lead in accumulated debt. The opposite of the previous reason is you can have one emergency after the other. If that happens, the debt on your card can continue to accumulate even before you have the chance to pay for the previous debt. Do not let that happen by relying entirely on emergency credit cards. Your credit score may be seriously affected by this.

  • Your budget will be ruined. An emergency can ruin your budget because you have to input your credit cards payments into it. Depending on how much you credited to your card, you can spend months or even years paying off this expense. That will limit your budget even further.

The thing about paying off credit card debt is you will be wasting a portion of your money on interest rates. Credit.com revealed in an article about medical bill nightmares that the credit extended for medical emergencies usually start out with a low interest. The example was 9.9%. But that will rise after the introductory rate to as high as 24%. Imagine the money that you will be wasting if you use your card for emergencies. And we all know that most of the expensive unexpected expenses are our medical treatments.

The better alternative to using a credit card for the unexpected

Obviously, the better alternative to emergency credit cards is growing your reserve fund. You want to be prepared to pay for these unexpected expenses in cash. But unfortunately, only 38% of Americans have an emergency fund. That is according to the data compiled by Statisticbrain.com. That means 62% of Americans do not have savings to deal with emergency situations. They are more than likely to depend on credit cards to help them survive a crisis.

If you are part of the statistic that does not have a cash emergency fund, you need to work hard to build up one. There are many benefits to relying on a cash emergency fund and here are some of them.

  • After the financial crisis, you do not have to worry about any additional payment and you can move on immediately.

  • You will not waste money on the interest rate.

  • You will be living a stress free life because you know that you are prepared for any emergency.

  • When tragedy strikes, you can concentrate on how you can solve it because you have the funds to back up any plan or solution that you can come up with.

Given all of these points, you know that you have to start computing your emergency fund target so you can work on your financial security. Growing your reserve fund to replace your dependency on emergency credit cards is simple but it requires some form of sacrifice from you. Naturally, you have to ensure that there is something left over from your income so you can put it aside in your savings account. You can work longer hours to earn more or you can cut back on some of your usual expenses. Either way will help you grow your emergency fund the fastest.

When is it okay to pay for emergency situations with credit cards

While we strongly advise you to build up your rainy day fund, we are not saying that you completely shun emergency credit cards. If you can only be a smart credit card user, you can really make this work for you.

What we are proposing is for you to have both – emergency cash and credit cards. But instead of prioritizing the use of your card, you turn to your cash first. If the need is great and you require additional funds, you can look at your card already for help. Here are important reminders before you use your emergency credit cards.

  • It has to be used for a real emergency only. That dress that you need to buy for a friend’s wedding is not an emergency. These include the car breaking down, an illness that has to be spent on or the pipes breaking.

  • You have to completely pay it off in the shortest amount of time. That way, you minimize the money you waste on interest.

  • Look for other options before using it. As mentioned, there are other ways for you to finance an emergency – you just have to look really hard for these options.

Be wise with your credit card spending so that you will have less to worry about in your llife. Here is a video from National Debt Relief to give tips on how you can get credit card debt help in case you have accumulated this debt already.

Tips To Help Increase Your Credit Score Without Using A Credit Card

woman looking at documentsA lot of people are asking: will opening more credit cards improve my credit score? This is actually a good question. Some people are convinced that this is the only way that you can start building up your credit score.

Here’s the thing. Your credit score is dependent on your credit report. This report holds details about any debt that you have. So if you have not taken any debt yet, then what information can you place on your report? And here’s where it gets more complicated: you need a credit score to be able to take on any debt. Given all of these requirements, how can you hope to build up your credit score?

This is where credit cards are “supposedly” there to help out. However, this is something that people are hesitating. After all, credit card debt put a lot of people under some serious financial trouble. A lot of our youth witnessed how it made the life of their parents and grandparents difficult. They do not want to follow the same footsteps.

Different ways to build your credit ranking without needing a card

Well if you do not want to follow their credit card mistakes, then you don’t have to. You are probably thinking about the next question by now: how will you build up your credit score if you cannot get any type of debt?

Here’s an important truth that you need to know: there are options to get a loan without the need for a credit score. It is limited, but there are other options. Let us list them down for you.

  • Get a federal student loan. If you are young and you are still in school, you may want to start working on your credit score by taking on a student loan. The approval of this loan does not really depend on your credit score. These do not require a credit check. Of course, for it to help you improve your credit standing means you have to know how to deal with student loan debt. That basically means knowing how to pay it back properly. Try not to be late, pay as much as you can – these are the usual tips that you will get so your student loan can help you build up a high score.

  • Try to apply for an installment loan. Sometimes, retailers will allow you to purchase a product and pay for it in installment. The great thing about this option is you are expected to pay for it over a long period of time. That will help you build up your credit score without making the payment too much of a burden. The important thing that creditors and lenders are looking for in your score is how well you can be trusted to pay back what they will allow you to borrow. That is the core purpose of this financial measurement. If you do good in this loan, then you can expect to have a good credit score.

  • Loan money from a credit union. First and foremost, this will require you to be a member. Look for a credit union that you can qualify to join and open an account with them. They operate in the same way as a bank – but instead of being governed by a board of directors, it is managed by the members themselves (more specifically appointed members). When you are finally a member, you can opt to get a small loan to help you work on your credit report. Based on the September 2013 data released by the Credit Union National Association through their site CUNA.org, credit unions have loaned an amount worth $642 billion. They have an asset worth $1.06 trillion. This proves that they are capable of loaning you money. If they decline because you do not have any background on debt, you can opt to get a secured loan. That means your loan is backed by the money in your account. They should be able to give you approval then.

  • Look into peer to peer loans. These are companies that operate online and connect you to private individuals who are willing to lend you money. No bank or financial institution is involved here. Also known as social lending, this is a great option for you to get the loan that will help you build up your score. Since it operated online, the overhead costs will not be as high for the companies managing them. That means they are not compelled to get a high interest rate from you. Although they look into your credit score, it will not cost you a very high score.

  • Request existing companies to file on your credit report. If you have rent, utilities and even phone bills that are recurring every month, you can ask them to file a credit report on your behalf. They are allowed to do so but it will be more of a favor for you than out of obligation. That should help boost your credit score. At least, it will if you had never been late on your payments.

These are some of the options that you have. There are other choices but we do not really recommend them – or we haven’t heard about them yet.

If you really want to use a card to improve your credit report…

In case some of these are not appealing to you, that is alright. You can still use credit cards to help you arrive at the high credit score that you are aiming for. Just make sure you will not commit the biggest credit mistake that you can ever make – and that is to bury yourself in credit card debt.

Just remember that the actual credit card ownership is not how you will get a good score. It is your attitude towards it. You have to know how you will use these cards so you can be viewed as a creditworthy consumer. Here are some tips that we have for you to help ensure that being a cardholder will really benefit your credit report.

Pay your dues on time. The most important thing that you can do to help your credit score go up is to avoid late payments. According to the information provided in MyFICO.com, late payments can affect your score based on how recent, severe or frequent you do them. Basically, they are saying that a recent late payment can put more damage in your score than a frequent late payments in the past. So try not to be late if you really want to boost your score.

Budget every credit card use. To help you avoid late payments, one tip that we have for you is to include your credit card use in your budget plan. That means allocating an amount that you can afford. You have to plan how much you can charge on your card to avoid overusing it. Also, it will help you put aside the money that will allow you to pay for your full balance at the end of every month.

Know how to use your card properly. Lastly, you have to educate yourself on how you can use your credit card properly. That means you have to understand what the interest is and how it can affect the finance charges on your balance. You have to know how the finance charge, late payment fees and other charges can grow your debt significantly. Also, you have to understand how the grace period can keep you from credit card debt.

Understand that credit cards are quite harmless if you know how to use it properly. You can own it, use to have a high credit score and still end up with zero balance every month. It is not about the debt itself that will build up your credit score. It is how you pay for it.

How To Be A Smart Credit Card User

woman breaking a credit cardThere was a time when credit cards were treated with respect. For example, my parents had just one credit card and used it very carefully. They made only a few charges each month and were almost religious about paying off their balances on time every time.

Today, we tend to be more nonchalant about our use of credit cards. They’ve become so commonplace that many of us take them way too much for granted. As a result many Americans are having a problem with debt – due to those little pieces of plastic.

Protecting yourself from overspending

Fortunately, there are things we can do to protect ourselves from credit card abuse. It begins with making some rules about the way your use your credit cards to avoid that sinking feeling of loss when your credit card statements arrive and you see how your balances have swollen to the point where you begin to feel things have become hopeless.

10 tips for avoiding credit card  problems

Here are 10 tips that for smart credit card use than can help prevent this from happening.

1. Pay more than the minimum. If you pay only the minimum amounts due on your credit cards each month, you’re basically sentencing yourself to credit card hell. In fact, if you do this you might literally never get out of debt. One example of this is if you owed $10,000 and made just a minimum payment of $30 or $40 every month, it could take you as long as 18 years to become debt free. On the other hand, if you were to make more than the minimum required payment, you’d be out of debt in no time. As an example of how this works watch the following video to learn how one family paid off  $12,712.65 in credit card debt in just a year.

2. Pay off your cards. This may seem obvious but the best way to stay out of trouble with credit card debt is to pay off your cards. If you have a card with small balance, pay it off first, then go to work on your other cards. If you concentrate on knocking off your debts one at a time, you might be surprised at how quickly things get better.

3. Be smart about how you charge. Make sure you never run up a card to its limit. When you use a card sensibly, it will have a very positive effect on your credit. Conversely, if you run up your balance to the max, this will have a negative effect. The reason for this is that when a financial institution checks your credit one of the most important things it will look for is how much credit you have available vs. the amount you’ve used. This is called your debt-to-credit ratio and the lower it is, the better. So if you must have a balance on one of your cards, make sure you keep it low.

4. Don’t take cash advances. Cash advances come with much higher interest rates than when you use a credit card to make purchases. If you have an emergency and no other choice, it might be acceptable to take a cash advance but otherwise, stay away from them – especially those “checks” you probably get periodically from one or more of your credit card companies.

5. Always pay on time. No matter what else is going on in your life financially be sure to pay your credit card bills on time. Most financial experts say that just one late payment can drop your credit score by as many as 50 points. This could easily move you from having “good” credit to “poor” or even “bad” credit, which could cost your money because of the higher interest rates you will be charged.

6. Don’t be afraid to negotiate. Go online periodically and check to see what other cards might be available with lower interest rates than the ones(s) you have now. If you find one with a better interest rate, call your current credit card provider and ask it to match that better rate. Smart consumers do this almost every month. And if your current credit card issuer won’t match the other card, transfer your balance to it.

7. Keep an eye on your account. If you’ve been paying any attention at all to the news recently you know that there was a credit card breech that affected more than 90 million Target customers. Now, more than ever, you need to keep an eye on what’s happening with your cards. Go online and check your balances regularly – at least once a week – to make sure all the purchases you see are yours If you spot any fraudulent activity, contact the credit card company immediately and alert them as to the problem.

8. Be careful about transferring your credit card information. Don’t send your credit card information via the Internet unless you’re positive the site is secure. There are phishers out there just waiting to steal your information. Never transfer a credit card number, your social security number or other important financial information to a site unless you’re positive it’s secure and trustworthy

9. Keep your credit card accounts open. When you pay off a credit card, don’t make the mistake of closing the account. This will lower your credit score because one of the five components used to calculate your score is “length of credit history.” If you were to close out an account you’ve had for a long time this would definitely ding your credit score. Plus, it would affect the total amount of credit you have available, which in turn would damage your debt-to-credit ratio.

10. Get your credit reports on a regular basis. There was a report issued by the Federal Trade Commission last year that one in five Americans have errors in their credit reports and that 5% have errors so serious, it could be damaging their credit scores. You can get your credit reports free once a year, either from the three credit reporting bureaus – Experian, TansUnion and Equifax – or on the site www.annualcreditreport.com. The best way to get your reports is one at a time at three-month intervals. That way you would be able to monitor your reports yourself and avoid the expense of paying some company to do it.

What to look forSample credit report and key

When you review your reports, look for negative items such as late payments, defaults, accounts that have gone to collection and missed payments as these are what would damage your credit score the most. If you do find one or more of these items, make sure they aren’t errors. If you do find a mistake, you need to immediately write the credit bureaus and dispute it. You will need to have documentation supporting your claim. But if you do this the credit bureau is required by law to contact the financial institution that provided the information and ask that it be validated. If the institution that provided the information can’t validate it or fails to respond within 30 days, the credit-reporting bureau must, by law, delete the information from your credit file. As you might imagine, this could give your credit score a nice and immediate boost – maybe by as many as 50 or 100 points.

In summary

The net-net of credit card usage is actually pretty simple. Just use your credit cards wisely and with common sense. Don’t run up huge balances you can’t pay off at the end of the month, never take cash advances and keep an eye on your accounts. Do this and you will be able to take advantage of the convenience of having a credit card without the danger of a person or an originator of the will and of falling into credit card debt hell.

How To Pay Down Those Holiday Debts

Woman depressed over billsIf you’re like us you probably over did it a bit – or even more than a bit – on your holiday gift giving. We try to budget carefully but always forget that tip we need to give to our newspaper delivery guy, that cousin in Toledo that deserves a present or the cost of that holiday dinner at our favorite upscale restaurant we always treat ourselves to. Plus, we always manage to spend more on some of our family members than we had anticipated.

If you did something like this and those (ouch!) credit card bills have you worried, what could you do to pay off those holiday debts quickly? Here are some suggestions you might find helpful.

Write out a list

Sit down and make a list of all those holiday-related expenditures you paid for with a credit card. If you see you won’t be able to pay them all off at once, divide the list by credit cards and then prioritize them by their interest rates. If you pay off the cards with the highest interest rates first, you will save money on interest charges over the next few months. And you should find it easier to create a realistic pay-off plan when you know your total holiday debt load.

Use your annual or holiday bonus

If you received a nice check as an annual or holiday bonus, you might want to use it for a luxurious vacation or some other fancy purchase but resist the temptation. Put the money instead towards paying off your holiday debts – to improve your financial situation. Trust us. You’ll feel much better when you’ve paid off those credit card debts than if you’d spent a week at the beach – where the memories you made soon fade.

Stop using your credit cards

Stop using your credit cards while you’re tying to pay down your holiday debts. Take a break from using them until you get your finances under control even if those cards have points or great cash back rewards. The best way to stop using credit cards is to leave them at home when you go shopping – so you won’t be tempted to use them. If you have a problem doing this, you might give them to a friend or relative for safekeeping.

Sell unwanted items or gifts

Did you find yourself opening gifts from cousin Hank or great aunt Babs and thinking, “Wow! What am I ever going to do with this?” If you got gifts you don’t want make a list of them along with any items you have lying around the house you don’t need or use. Put the items on eBay or Craigslist and sell them. Be sure to do some research before listing them to make sure you price them fairly and realistically. Take some good quality photos and write strong, attention-getting headlines so you can sell those items as fast as possible. Heck, you might raise enough money in just a few days to pay off all your holiday debts.


man holding multiple credit cards

Sell gift cards you can’t use

There are online marketplaces such as Alula and Cardcash.com where you can sell unwanted gift cards. Alula has kiosks where you could turn in those cards and immediately get a voucher you could redeem right in that store. Plastic Jungle used to buy gift cards but now offers three non-cash options. You could use it to turn your gift cards into Best Buy rewards points, exchange them for a CVS gift card or swap them for United Airlines miles. If you choose to sell your gift cards, be sure to read the fine print so you will understand how much money you will actually get back after any transaction and selling fees. How much can you expect to make selling a gift card? You’ll probably get anywhere from 65% to 85% of the card’s value.

Transfer your balances

Could you qualify for one of those 0% interest balance transfer cards? If so, you might transfer all your credit card balances to it and enjoy from six to 18 months’ interest free. This means all your payments would go towards reducing your balance instead of being gobbled up by interest charges. If you heavy up on your payments during that interest-free period, you could have your entire balance paid off before it expires. Be aware that some cards charge a balance transfer fee. Check this out before you sign up for that new card to avoid an unpleasant surprise.

Make your payments weekly

Don’t wait until you get your monthly credit card statement and then make just the minimum payment. Make your payoff plan a top priority by doing weekly payments. This will both reduce your interest expenses and help you get back onto a solid financial footing, as it should strengthen your commitment to become debt free. However, don’t start doing this until you’ve contacted the credit card company (companies) to make sure it will accept weekly payments.

Adjust your spending habits for three or more months

You will probably need to make some changes in your budget and scale back your spending for a few months so you’ll have more cash available to pay off those holiday debts. For example, you might cancel your health club membership or some other subscriptions you no longer need. You could tighten up on your grocery budget by using coupons or by buying items in bulk. You might be able to cut your cable bill by downgrading the number of channels you receive or maybe you could drop cable and stream your entertainment from Hulu, Netflix or some similar source. Whatever you decide to do be sure to keep track of how much money you’re saving. Add up that amount at the end of the month and then calculate how much it reduced your debt load as this can help keep you staying with your plan.

Use these tips to help pay off even more holiday debtSmiling woman hugging sack of groceries

If you’re really interested in paying off those holiday debts, here are some suggestions you might find helpful.

  • Focus on buying items at the grocery store that are on sale or are generic brands. These usually have the same quality as brand name items but can cost 40% to 50% less.
  • Buy and sell clothes at a consignment store. You will not only make money this way, you can often find very high quality clothing for pennies on the dollar.
  • Skip soft drinks when you’re eating out and stick with water. Also, skip dessert. Getting coffee, soft drinks or a dessert will increase the cost of that meal by 20% to 30%.
  • Trade services with friends. For example, you might be able to trade out handyman services for haircutting, photography for babysitting or pet sitting for housekeeping.
  • Give baked goods, service IOUs or other homemade gifts in place of expensive presents.
  • Boxed cereals can be very expensive. Switch to eggs, oatmeal or fruit for a better and more nutritional bang.
  • Call your utility companies and switch to a budget plan so that your expenses will be more consistent and predictable each month.
  • Don’t host or attend any in-home parties where you would be pressured to purchase things.
  • Brew your coffee at home instead of buying it at one of those drive-through stores or at work.
  • When you cook dinner, make extra servings on purpose so that you will have leftovers for lunch or for dinner the next day.
  • Pack your lunch. You don’t have to do this several times a week but if you do it regularly, it will definitely save you money.
  • Check out books and videos from your local library. You may not find the most recent movies but you should be able to find classic movies including those wonderful children’s’ films.

Do You Need To Kick The Credit Habit?

woman thinkingAre you a credit junkie? Millions of Americans are. As an example of this in 2011 the average American household had credit card debt of $15,279. The median household secured debt was $91,000 and US families had an average mortgage debt of $149,456. Plus, in March 2012 the percent of households that had credit card balances was 39%. This means that nearly 40% of credit card holders were unable to pay their balances when due. Even more alarming there were 1.18 million non-business bankruptcies just in the year 2012.

You maybe a credit junkie if …

Do you have more than two or three credit cards and can pay only the minimum or less on them? Then you might be a credit junkie. You might also be a credit junkie if you have to juggle other bills in order to pay the minimums on your credit cards or if you charge items that you used to pay cash for such as food, gas, lunches, etc. You might be a credit junkie if you constantly incur late or over-the-limit fees on your credit cards and if you take out cash advances to pay other expenses or bills. Have you taken out one or more debt consolidation loans to pay off your credit card balances but then began charging on the credit cards again? Or have you used your bank’s overdraft protection when you’ve written checks that you can’t cover? Then you might definitely be a credit junkie.

Do you also make these mistakes?

If you’re a credit card junkie you might be compounding the problem by making these common mistakes.

First, do you not read your credit cards’ terms and conditions? In one recent survey 40% of the respondents said that they did not understand the terms, conditions and rewards programs of their credit cards. If you fail to understand your cards’ terms and conditions you’re bound to run into trouble – if not now then very soon.

Second, do you clearly understand your finance charges? In one survey JD Power found that a full 73% of those who responded did not comprehend the interest rates they were being charged. At the minimum you must at least know the rate you’re paying and the penalty rate if you don’t pay. Failing to understand this is a sure path to creating more debt.

Third, is misunderstanding the terms of an introductory offer. While it might be a good idea to shift your high-interest credit card balances to a 0% interest balance transfer card, it’s a mistake to not read the fine print. You will be charged interest once your introductory period expires and it could be as high as 18% or even 20%.

Fourth, do you get credit cards for the wrong reasons? Are you tempted to get a card because of its rewards program instead of choosing one that has a low interest rate? It’s important to understand that the credit card companies are not your best friends. Their objective is to extract as much money from you as possible. This puts the burden on you to not let that happen. And the best way to do this is by comparison shopping for your cards to make sure you will be getting the best interest rates.

How much debt is too much debt?hands chained while holding coins

Do you honestly know if you’re carrying too much debt? There is an easy way to find out. First add up all of your fixed monthly debts including all those credit card payments. Next, add up all of your monthly income. If you get money as gifts or receive bonuses or commissions, total them up, divide by 12 and add that number to your normal monthly income. Finally, divide your monthly income into your monthly debts. This is your debt-to-earnings ratio. For example, let’s suppose that your total monthly income is $5000 and your total monthly debts are $2500. You would have a debt-to-earnings ratio of 50%, which would be much too high. Most experts say your ratio should be no more than 30% and, of course, the lower the better.

How to break the credit habit

If you have now learned that you’re a credit junkie, you need to get to work and break that habit. First and foremost you need to stop using credit cards and begin paying cash for everything. One easy way to stop using your credit cards is to shred all of them but one and then lock it away or give it to a relative to hold. Or you could do as one woman did and freeze it in a container of water. Do this and you would have it available in the event of an emergency but it would not be so easy to access that you would be tempted to use it for some impulse purchase.

Another trick for breaking the credit card habit is to reward yourself for not using them. You could build a new habit via positive reinforcement. Every week that you don’t use a credit card you might reward yourself with some small indulgence like a latte at your favorite coffee shop or a visit to your neighborhood ice cream store. Just make sure you keep those indulgences cheap.

How about using old-fashioned self-control? You should be able to apply the same self-control you use to get to work on time every day to stop using credit cards.

Finally, you might try a little shock therapy by figuring out how much interest you’re paying a year. As an example of this, if you have a balance of $1000 on a credit card at 14%, it would take you 4 ½ years to pay it off, assuming your payments were $25 a month. At the end of those 4 ½ years you’ll have paid $347.55 in interest. Just ask yourself if there aren’t better ways you could use that $347.

Review your credit reportsCredit Report

If you truly want to kick the credit habit you need to get and review all of your credit reports to see exactly where you stand. You can get them free once a year either from the three credit reporting bureaus – Experian, Equifax and TransUnion – or on the site www.annualcreditreport.com. Once you get your reports you need to review them carefully to make sure they don’t contain any errors that could be damaging your credit. This can also help you understand why you’re having a problem with debt.

Don’t try to borrow your way out of debt

You can get your debts under control and ultimately paid off. The trick is to not borrow any more money because as the old proverb goes, you can’t borrow your way out of debt.

While you could be tempted to take out a debt consolidation loan and get all of those other creditors out of your life, it’s not a real solution. All you’re really doing is stretching out that debt over a longer period of time. For example, if you were to get a secured loan such as a homeowner equity line of credit or home equity loan, you’d probably be paying on it for anywhere from 10 to 30 years. You might be able to pay off an unsecured loan quicker than this but you’d likely end up with a higher monthly payment than the sum of the payments you’re currently making.

Another not so good option for getting your credit card debts under control would be to transfer all your credit card balances to a 0% interest balance transfer card. This could work but only if you are able to pay off your balance before the end of the introductory period. If not, you would still be in debt and probably at a very high interest rate.

Two healthier options

Two other ways to get debt under control are debt settlement and to snowball your debts. Both of these represent better options because neither requires you to borrow more money.

If you’re not familiar with debt settlement this is where you hire a company such as National Debt Relief to settle your debts for you and for much less than you actually owe. When you owe less you should be able to get out of debt much quicker and with a lower monthly payment. Snowballing your debts means ordering them from the one with the lowest balance down to the one with the highest. You focus all of your energy on paying off the debt with the lowest balance while continuing to make the minimum payments on your other debts. Once you get that first debt paid off you would have more money available to pay off the one with the second lowest balance and should be able to do it fairly quickly. You would then go to work on the debt with the third lowest balance and so on until you became debt-free.

If you’d like more information on using the debt snowball to pay off debt, watch this video.

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