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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 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.

“Why Was I Turned Down For Credit?”

frustrated woman with glassesIf you’ve been denied credit you should have been told why. The Fair Credit Reporting Act (FCRA) mandates that if a company turns you down for credit, it must tell you why. And the answer must be specific. They can’t give you a very general reason like “you didn’t meet our standards” or you didn’t score high enough in our ratings.”

“Valid reasons?”

There are some specific reasons why you might have been turned down. For example, it might be because you haven’t borrowed money in the past and have no credit history. It could be that you don’t fit the lender’s profile or that there were too many searches on your credit report. You could also be turned down because you’ve had financial problems in the past and have a low credit score.

Why most people are turned down

Most people are turned down because of the “financial problems in their past”. They may have missed payments on one or more of their debts, had a bankruptcy or defaulted on a loan.

Get your credit report

Regardless of why you were turned down, you need to get your credit report and check things out for yourself. You can get your credit reports free from the three credit reporting bureaus at the site Review them carefully. Be on the lookout for items that may be causing your problem. Be especially alert for errors in your reports. The Federal Trade Commission (FTC) recently released a report that nearly 26% of us have errors in our reports and at least 5% have ones that could be affecting their credit scores.

Don’t fall for those credit repair scams

If you search Google on the term “credit repair”, you’ll find a lot of companies that say they can repair your credit. Despite what they might claim, nobody can get negative items removed from your credit report. The only thing that can eliminate bad items such as defaulting on a loan is time. This information will ultimately drop off your file but it may take seven years. In fact, the only thing those “credit repair” companies can do is review your file and have errors removed. However, this is something could can do yourself.

How to dispute an error

If you do find errors in your credit report, it’s relatively easy to dispute them. You’ll need to write a letter to the credit bureau whose report contained the errors and dispute them. The credit bureau must then ask the company that provided the information to validate it. That company has 30 days to respond. If it fails to do so, the credit bureau must remove the item from your credit report. Of course, if the company that provided the information can prove it was valid, the item will stay on your report and there’s nothing that can be done about it. (Click here to learn more about writing a credit dispute letter.)

What you can do

In the meantime, you should get to work and clean up your credit. You might start rebuilding your credit by getting a secured credit card. This is one where you make a deposit – usually $300 or $500 – and then charge against the card until you’ve used up your deposit. At that point, you could add more money to the card and continue using it. The credit card companies should report how you use your secured card to the credit bureaus, which will eventually help with your credit score.

An Excessive Amount Of Debt Results in Credit Problems

The sad fact is that many people get heavily in debt because they just don’t know how to handle their finances. Or they may get into financial trouble because of issues they could not control. For example …

  • Unemployment
  • A reduction in earnings
  • Health issues
  • Divorce
  • Educational costs
  • A death in the family

Reckless spending

On the other hand, many people get in trouble financially for things they could have controlled such as reckless spending. Young people who have not yet learned how to handle credit can be especially guilty of this – though it can happen to older people as well.

Identifying the biggest problem

One good way to know if you have – or will soon have – a serious debt problem is to calculate your debt-to-earnings ratio.  You do this by adding up all your debt, divide this number into your monthly gross earnings and then multiply by 100. Here’s an example of calculating a debt-to-earnings ratio.

Monthly gross earnings after taxes:  $3,000

Total monthly debt obligations:  $1,600

$1500/$$3000 = .50 times 100 equals 50%

In this case, the debt-to-earnings ratio exceeds 38% meaning that a person with this ratio would have a debt problem.

Danger signs

If your goal is to avoid having a problem with debt, there are some warning signs to watch out for.

  1. No savings or minimal savings – one big danger sign is that if you don’t have some money put away for emergencies. This means that one issue such as a trip to the hospital could instantly put you in deep debt.
  2. Inability to pay bills promptly – this is another danger sign that you could be in trouble. If this is the case, you need to create a household budget and maybe arrange for automatic bill payment as much as would be possible.
  3. Using payday loans to pay bills – if you have to do this, it’s a sign that you’re already struggling with debt and your problems will probably just get worse due to the excessive interest rates you’re paying.
  4. Making just the minimum payments on your credit cards – can easily lead to running up more debt as you continue to charge on the cards without actually reducing your balances.
  5. Maxing out your charge cards – if you’ve maxed out more than one charge card, you have too much debt. Plus, this can have a very negative effect on your credit score.
  6. Denial of credit – if you’ve applied for credit and been turned down, your situation is very serious and must be addressed immediately.
  7. Not aware of how much you owe – denial is not just a river in Egypt. If you don’t know – or won’t learn – how much you owe, you can just about bet you’ve already exceeded your limits.
  8. Lying to yourself, your family or friends – it’s a very serious danger sign if you find you have to lie about your spending habits because you’re ashamed of how you have mismanaged your finances.
  9. Calls from debt collectors – if you start receiving calls or letters from debt collection agencies, you’re in trouble financially with no ifs, ands or buts.

Get your debt back under control

If you see two or more of these warning signs, it’s time to get to work and get your debt under control. There is probably a consumer credit counseling service in your area. If so, you need to meet with a counselor and go over all your debts and income. The counselor will help you develop a payment plan and may even be able to work with your creditors to get your interest charges reduced and late fees waived so you might be able to get completely out of debt in just a few years and without having to totally sacrifice your lifestyle.

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