Credit card debt management is a challenging issue in this country. It is an unfortunate fact that Americans carry a lot of credit card debt. The average household in the United States has at least one credit card, and the average debt amount is over $10,000. Combine this fact with the current economic climate and you can see how poor management of credit card debt can lead to serious financial trouble. Before getting into this situation, you’ll need to remember a few important things that are sure to help.
Understanding Good Debt vs. Bad Debt
First, you need to separate good debt from bad debt. Yes, there is such a thing as good debt. Good debt is debt that finances a revenue generating purchase. When you evaluate what debt items generate revenue you can count your mortgage, because your home builds equity and income tax benefits with every payment. You can also count student loans as good debt if they help provide access to the education that will advance your career. Bad debt is used to secure purchases that are quickly consumed (vacations or meals at fancy restaurants), or items whose value won’t equal their purchase price over the long term (expensive gifts or overpriced non-necessities).
Once you define a potential purchase as bad debt, consider if you can do without it, if you can buy it with cash, or if you can delay the purchase until you have the cash available. If you decide to make the purchase on credit, consider your expected cash flows. That is, will you be making enough over the next two to three months to pay off this expense while still meeting regular living expenses?
Prioritizing Your Accounts
Next, if you have already built up significant credit card debt, you will need to evaluate which of those credit accounts are of the greatest priority. What this means is that you will need to look at the accounts critically and assess which have the greatest interest rates (making them the most expensive accounts to maintain balances on), then separate credit accounts by their purchase power. For example maintaining a current balance on a $5000 Visa Gold card is more critical than a $100 gas card. Those cards that fall into the less critical category can’t be neglected, but usually they are the credit accounts that will be the most flexible in making arrangements like deferred or reduced payments and interest rates – give them a call.
You may need to call those accounts that are in the high priority as well. If so, don’t be ashamed or afraid, these companies would most often prefer to make some accommodation than receive no payment at all. But, if at all possible, these high interest accounts should be paid off regularly. Revolving balances should be kept at no more than one third of the total amount available on these cards, and if you can’t pay off the balance in full in a short amount of time, you will need to remember to pay as much over the minimum amount as possible. Most credit accounts are structured so that making the minimum payment may not even pay off the monthly interest amount due.
Remember that you don’t have to open every credit account that is offered to you. Be very careful how many credit accounts you have open and what types of accounts they are. Surprisingly, the major credit bureaus look poorly on a profile listing dozens of open credit accounts, especially if they amount to a low total available. This means it might be better to use the Visa or MasterCard instead of applying for that department store card just to get the promotional 10% off at the register.
Determining Available Resources
Consider all of the resources at your disposal. You may have ways to eliminate your credit card debt you never thought of. For example, you might consider refinancing your mortgage to completely eliminate your credit card debt (you might just reduce your mortgage payment at the same time). If attaining an equity line of credit, understand that this is also a credit account that is secured by your home, and can have high interest rates depending on your particular situation.
If you have a 401(k), you may be able to borrow against it at a much lower rate than your credit cards, but don’t fail to consider what effect this choice might have on your retirement. Have a garage sale and dedicate the proceeds to your critical credit card accounts. Don’t be afraid to ask family or friends for assistance. If you are carrying a really large debt load (over $10,000) you might consider consulting with a non-profit credit counseling agency.
It’s generally a bad idea to take cash advances from one card to make payments to another credit account. Also, don’t use a payday advance service to make credit card payments. These two strategies boil down to jumping from the frying pan into the fire. If you find yourself considering these tactics, know that they often create a more desperate situation.
No matter what your credit situation, it is always a good idea to maintain as much of a cash cushion as possible. Most experts recommend at least the equivalent of three months basic living expenses, but in these times it’s probably a good idea to make that cushion as large as you can afford. You may even want to budget some of your regular credit card expenses onto your monthly budget. If you have one or two cards you maintain regular modest balances on, take the average of your last three or four minimum payment amounts and budget double that amount as a regular monthly expense.
Choosing Credit Cards Wisely
Finally, select the types of credit accounts you use carefully. Shop interest rates, features, benefits, and purchase power with care and diligence. Balance your specific credit needs with what any credit card product can offer. The process of attaining, maintaining, or building good credit can be a daunting task to say the least. However, once you are properly managing your credit, you will be surprised at how many financial opportunities become available to you.
Take advantage of the free credit card chaser above to input all your data once, and get recommendations on the best cards to meet your debt management needs. Do it now and be in control of your finances sooner than you thought possible!
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