Managing Your Credit Debt

Buy now and pay later. It′s become the American way. There′s no doubt that a credit card can be a powerful and useful tool. However, as more and more Americans discover every year, too much of a good thing can lead to big trouble.

According to CardWeb.com, the average American family owes over $8,000 in credit card debt. Remember, this is an average. For every family that′s way below this average, there′s another family that′s way above the average. Where you fall in relation to this average can help you determine exactly how serious a problem your credit card debt really is.

It′s important to recognize that no matter what you do, you′re not going to get out of credit card debt over night. It probably took you several years to accumulate the debt you have now, so it′s understandably going to take you some time to get this debt under control. The good news is that as soon as you start, you′ll begin to see both financial and psychological benefits.

The first step in gaining control over your credit card debt is understanding how you use your credit cards. Do you save them for unusual expenses like automobile repairs and medical bills? Or do you routinely find yourself reaching for your credit card to pay for a TV Guide, a bag of Cheese Doodles, and a bottle of shampoo?

If you use your credit cards to pay for simple, everyday items, your debt is sure to creep up. You should make a commitment to reserve your credit cards for significant and/or unexpected expenses.

Once you′ve established smart usage guidelines for your credit cards, you need to apply those guidelines. In other words, stop using your credit cards. This may seem obvious, but it′s the most important step you can take to reduce your credit card debt.

Do you have any cards that are maxed out? Cut them up into little pieces. After all, they′re of no real use to you. They only represent temptation every time you get a few dollars paid down.

Each time you look at your credit card statement, you probably grumble over the fact that a huge portion of your minimum payment was applied to interest, reducing your actual balance by only a small amount. The way to combat this effect is to pay more than the minimum amount. Even if you can only pay $10 extra each month, this is an important step, because every extra dollar you pay is applied to your balance. You′ll be surprised at how quickly your balance begins to drop.

One popular approach is to transfer your high-interest credit card debt to some lower-interest loan - either a home equity loan or a low-interest card. This can save you a lot in interest, but be careful. This strategy requires quite a bit of discipline.

If, for example, you use a home equity loan to pay off your credit cards, the only thing keeping you from running those credit cards back up is your own will power. If you′re careless, you could find yourself in a worse position than you were before - maybe even with your home ownership in jeopardy.

The rise in credit card debt has also given rise to the so-called credit counseling industry. These firms promise to negotiate with your creditors for reduced interest and payments. While some of these firms are better than others, it′s important to note that your creditors are not legally required to negotiate with these firms. Most creditors will negotiate because they know the alternative - bankruptcy.

Bankruptcy should be used only in the most extreme cases. While having your credit card debt completely erased may seem tempting, bankruptcy has several long-term, negative effects. The most obvious is that your credit is essentially ruined for several years, meaning it will be difficult if not impossible to obtain credit even when you really need it.

This may not seem so bad, since your goal is to get out of credit card debt anyway. However, on a more practical level, bankruptcy means having to live completely on an all-cash basis. If the car breaks down, you either pay cash or don′t get it fixed. When it′s back-to-school time, you either write a check for the kids′ new clothes or send them to class in worn-out items from last year.

Once you get your credit card debt under control, it′s just as important to keep it under control. The popular thinking is that you should never charge more than you can pay off at the end of the month. This is, of course, easier said than done.

A more practical approach is to impose your own limit on each card, regardless of its actual limit. For example, if your card has a limit of $2,000, you may choose to impose your own limit of $850. That way, you′ll always have your credit card debt under control, and you′ll have plenty of cushion in case of emergency.

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