Credit Card Debt

Credit Card Debt

When you purchase an item that you can’t pay for through a card system, the debt incurred refers to credit card debt. It is an accumulation of a client’s outstanding balances owed to the card company. Credit card debt increases through interests accrued on the principal amount, and via penalties when the client defaults in payment. Because no collateral is required for owning a credit card, it has gained wide acceptance and fuelled a consumerist attitude among Americans. More than 189 million Americans have credit cards, with the average cardholder owing at least four cards.

Rising Credit Card Debt

Due to its accessibility and revolving nature – which means that debts can be carried over monthly, credit card debt can be a useful stop-gap measure we can activate to meet pressing financial needs. However, this is also the reason why there has been an astronomical increase in credit card debt, especially in the United States. Credit card debt has been on the rise since the wake of the Great Recession.

According to data released by the Federal Reserve, Americans collectively owe over a trillion dollars in credit card debt. The average American family is indebted by  $8,377. The increase in credit card debt has led to a spike in delinquency rates. In 2019, the Federal Reserve reported a rise in credit card delinquencies of 30 days or more, after tapering off for years. This implies that more people are defaulting on their credit card payments leading, a trend which is seen as evidence of an economy that isn’t doing well. 

How Do You Get Out Of Credit Card Debt?

If you are late paying your credit card debt, sooner or later, you would find yourself sinking in a quicksand of debt. So how may we dislodge ourselves from the treadmill of mounting credit card debt? Below are steps we can take to reduce our credit card debt. 

Pay Promptly

You can reduce your credit card debt by paying your outstanding amount promptly. This reduces the interest accrued on the principal and ensures that your loan does not revolve. Paying promptly also gives you psychological leverage that comes with the debt figure reducing. It also makes you feel more in control of your finances. 

Owing is a choice

Even though debt gets shoved down our throats through the allure of credit cards, trumpeted by the media and advertisers that paint a glamorous picture of consumerism, you have to remember that it is you who decides to take up the debt. It is possible to use credit cards and stay out of debt. The key is being financially disciplined and going for only those things we need. This does not mean we can’t enjoy the pleasures of life, but only if we can afford it. Remember, a debt essentially means you want to use your future money now. Incurring debts robs you of your financial future.

Pay Smartly

You can reduce your credit card debt by paying smartly. Though this consists of developing a repayment plan, it is not restricted to it. You also have to up the ante on your money management skills. You can start by prioritizing payments by interest rates, i.e. pay the high-interest balances first. Another strategy is to suspend charges on the credit card while in repayment mode.

Keep It Short

Sometimes, we can’t do without taking out debt on our credit card. Let’s face it; credit cards do save us a lot of financial worries – for now. Provided your debt is not in the long term; it makes it faster for you to offset your loan. A short-term debt means less interest, which in turn reduces the total amount you would spend on servicing the loan. So long as you keep the repayment time frame short, you are in a strong position to wriggle out of your credit card debt. 

Settle For Less

You can settle your credit card debt for less than the actual amount. However, this only applies to people who are unemployed, in financial distress, in dire medical condition or have their debts spiralling out of control. If you find yourself in such an unfavourable financial situation, you can call your creditor and make an offer to settle the debt for less than you owe. Though it is not easy to have your debts written off for less than their actual worth, It is possible, but you need to offer a lump sum. Still, this strategy should be taken as a last resort, when other attempts at reducing your credit card debt have failed. 

Dangers Of Credit Card Debt

Credit cards could be helpful, but also potentially dangerous, especially if you lack financial discipline. Most people are fascinated by the illusion of “free” money. This makes them careless with their spending, most tome incurring debt through the purchase of items they do not need. If you are flirting with the idea of getting a credit card – or dropping yours – understanding the dangers that come with credit cards can help you cultivate better credit card habits.

You Spend More

Because the debt is revolving, most people tend to ease on the breaks when making purchases through their credit cards. Furthermore, the convenience that comes with not feeling pained by cash leaving your wallet may explain the rising wave amount of credit card indebtedness. Studies have shown that people spend up to 100% more when using their credit card to pay than when paying with cash. If you have multiple cards, it becomes more challenging to keep track of your spending, which makes it easy to overspend.

Increases Time Used To Offset Your Balance

Because you owe, your interest rate increases the amount you pay on the principal. This increased amount has a psychological effect on you which may make you avoid pay off on your credit card debt. The figure from the accrued interest may seem like a mountain too high to climb over, so we tend to default. Not paying your credit card balance in full, implies that whenever you pay a portion goes to service the interest, thus increasing the time it would take to pay off your balance.

Ruins Your Credit Rating

Once you are tagged as a serial debtor, your credit rating plummets. Credit card debts negatively impact our credit rating. Worse, is if those debts are mounting and revolving. It gives the impression that you are a high-risk customer, and as such finance organizations such as insurance companies may bill you higher when taking out loans with them. To maintain a high credit rating, you need to keep your account balance under 30% of your available credit limit. Most finance professionals would advise keeping your credit utilization to the barest minimum.