Thoughts on Debt

Okay, so we realize that the banks in this country are going under, but how will that effect the average consumer.  Well, it will mean that the whole credit system will need to be revamped and this may or may not be a good thing depending on who you are.  The credit card and loan companies don’t have any more money left to lend and are in the process of actually recalling the credit that they have overextended to everyone.  If you don’t have all your credit used, the bank may close down the credit lines that you have available to you right now.  For some people, this is devastating, while others are taking clear advantage of the system and maxing out all their credit turning it to cash for use later.  Only one problem, you are putting that money where? Of course in the bank, so what you are really doing is giving them the money back anyway.  Now that is not a problem until everyone doesn’t pay back their debts.  Then the banks will be left without money and whose money do you think they are going to use? Of course, your money (which essentially is really their money).

The problem is now, people are realizing that unless they have exemplary credit and no outstanding balances, they won’t be getting any new lines of credit.  This means that they won’t pay back what they have outstanding now because the banks really have no recourse, and there is no more money coming.  Debt collectors are getting desperate, since they really can’t collect on outstanding balances owed and they are going to have to cut enormous deals to get people to pay.  After all, most people are thinking the country just fronted them huge amounts of money, why should we pay them again? The only problem with this, is that our country will never have any type of credit card or loan system again, because if this one can’t be saved and things only get worse, people will only be able to buy what they can afford, and at the wages we are making people it ain’t much.  I personally think that is the way it should have been all along, but the banks and credit card companies decided to get greedy, leaving just about everyone in a hole that they can’t get out of.

Many people remain uninformed about credit card debt and about credit cards in general. When asked about their debt, 35% of American’s said they carry balances on credit cards, and about 5% said they didn’t know. (How do you not know?) Maybe it is just that they don’t want to admit it. Studies by the Federal Reserve and data release by credit card companies indicate that the percentage of households with credit card balances in this country is at least in the mid 40’s. It could be even higher with the economy on the down swing.

In a separate study, nearly 2/3 of more than 1,000 people said they carry a revolving balance on one or more of their credit cards. Another 8% said they didn’t know whether or not they did. And 15% of people with credit cards say that they have experienced at least some amount of difficulty in paying their minimum balances. They continue to do studies about consumer debt which still show that most consumers don’t really understand the whole thing. They have a limited understanding of reading their credit report, understanding their credit scores and in spite of this they say that consumer knowledge about credit is improving. For example, less than a third of Americans understand that a credit score is a number that estimates your likelihood of paying back a debt. A credit score is based on but is separate from your credit reports. The three major credit reporting agencies are Equifax, Experian and TransUnion and the best known credit score is the FICO . The best way to improve your credit score is to pay all your bills on time. The range is about 300-850 and the higher your score the better the credit you can get and the lower the interest rate available to you.

More than a third of American’s were unaware that insurance companies use credit scores to approve your coverage and to set your rate. Less than 3/5 knew that regularly maxing out a credit card, even if paying your bills on time will lower your credit score. In addition, 79% of American’s thought they could get their credit score free once a year, however that is your credit report, not your credit score. You generally have to pay about $15 for your credit score number.

Most people don’t realize that they need to be checking their reports for accuracy every year, and they should check their credit score every few years and before they apply for a mortgage or other large line of credit. Washington Mutual estimates consumers can reduce finance charges by $105 a year on average by raising their scores 30 points.

Knowledge is power and knowing more about credit, how it works, and how we can make it work for us, is an important part of the system. Getting information now about credit, debt, credit score and other credit information, can help us improve our credit score and keep it in good standing. This can open up some major opportunities for you. Just remember it is never too late to start improving your credit rating.

Credit cards can be a very helpful tool, but they can also be one of the biggest financial pitfalls if you are not careful.  There are some things that you need to know when applying and using credit cards.  The following are some tips to using your credit cards wisely.

1.  Make sure you are aware of changes in rates and rules.

2.  Pay your balance monthly, even if it means taking out a personal loan.

3. Apply for a card with a credit union instead of a bank, they have less fees and lower interest usually.

4. Don’t use credit cards when traveling abroad.  Conversion fees are steep, instead use an ATM machine to access your bank account or use traveler’s checks.

These are just some wise tips in using your credit cards, however, there is a whole other realm of credit card use that you must be aware of.  This is when the credit card companies change rules mid stream or offer low rates to draw in your business and then raise them without you being aware.  Some recent reports show that consumers have been fooled by some of these “tricks” and so these are the things that you need to be aware of.

YOUR RATES ARE RAISED WITHOUT YOUR WARNING

You are going along and paying your bill on time but you have a late payment on another card, or your credit score drops for some reason and the credit card company raises your rate on all of your cards.  Even if you come close to your credit limit, this can cause your rate to increase even if you haven’t exceeded it.  If this happens your credit card company is required to let you know so be sure to read all the correspondence from them carefully and keep a close eye on that bill.  No one needs surprises like this, and it is perfectly legal.

YOUR DUE DATE CHANGES

On late payment can allow them to raise your interest rate higher then you probably even think is possible.  Due to this, some banks unknowingly will change the due date on your bill, so that your payment is due sooner than you originally thought, causing your payment to arrive late and giving them license to raise your interest rate.  Again, look at that bill very carefully as this is another completely legal practice.

EXTRA CHARGES AND PENALTIES

Know how much extra your credit card company will charge you for cash advances and balance transfers before doing them.  Large fees can be associated with these types of transactions and once you do them, you will be stuck with the bill.

MISLEADING INTRODUCTORY RATES

You will receive credit card offers for low interest credit cards, and you think this is great and you transfer your balances or run up the card and then you find out that the interest rate shoots up to about 30% after the first month.  Be sure to read the fine print and keep in mind that if an offer seems too good to be true, it probably is.

MANDATORY ARBITRATION

Keep in mind that about 75% of credit cards have clauses that say disputes must be resolved in private forums, so when issues arrive you can’t take them to court.  Even if those issues are ones of identity theft or things that are out of your control.  Studies have shown that if you take a company into arbitration you will lose since in arbitration the credit card companies win on the average of 96% to 99% of their cases against consumers.

In short, be sure to think twice before buying on credit, and be even more rigorous about reading your credit card statements and applications.  These are the keys to keeping your money in your hands.

I recently saw an infomercial on TV about debt.  I thought it had some very interesting information about how credit card companies prey on the weak.  This interview was with someone who had written a book about resolving your debt, I am not sure that I really want to plug this book, hence I am deliberately omitting the name of it from my article.

The author had some interesting thoughts that I want to share with you.  He said that credit card companies specifically target people who are low income, students, uneducated, and minorities for the sole purpose of getting them in over their heads.  Counting on the fact that it is the people without money who will max out their credit cards the quickest.  Now you may ask yourself how this serves them.  Well, let’s say for instance that you charge $1000.00 on a card that’s limit is $1000.00.  You start out making the minimum payments, but the account keeps growing and with interest your account goes over the limit and that costs you an additional $45.00 per month, and then you send in a late payment and that costs you another $45.00 and before you know it your balance when it goes to collection is about $5000.00.  Figuring that you made $600.00 worth of payments while paying the minimum and you only borrowed $1000.00 in reality then you would owe about $400.00 to the credit card company, but now they are saying you owe $5000.00 now many people actually do at least begin paying towards that $5000.00 and many actually pay it off.  If you don’t however, the company is really only out about $400.00 and they get a tax break on that money from the government and then turn around and sell the $5000.00 debt to a collection agency.  This process can be seen by many as legalized loan sharking, in the fact that with interest and charges your balance can go from $400 to $5000 in almost the blink of an eye.

People who pay their credit cards every month, provide very little income to the credit card companies and therefore they want nothing more than to see you overspend and fall flat on your face.  The problem that most people with debt face, is even after they realize their mistakes, stop spending and try to pay down their bills, they are too late because the charges are rolling in and the debt keeps increasing, even though they are not spending at all.

This book claimed to have answers and debt solutions, however, after looking into it, this particular author has tried several different avenues of scamming the public through the years, and therefore, I would not recommend his book to anyone, however, I did think that the information about the credit card companies and how they make money on you even when you don’t pay was extremely informative and worth sharing.

Credit seems to be one of those things damned if you do, damned if you don’t. What are the right choices? Is it a good idea to have a credit card? Do I need one?

Credit unfortunately is a necessary demon. You must obtain credit and use it wisely. If you purchase something on your credit card it is a good idea to spread out the payment of that item over the next 3 months and then pay it off. Then do the same thing a few months later. If you can’t afford something than don’t buy it. This is the rule. In other words, credit cards are not something that you should use to pay for something that you really can’t afford. If you do this, you will either wind up paying so much in interest that the item will cost 3x what it actually did, or you may fall into a trap of not being able to pay your bills on time, which could put a serious dent in your credit. Credit cards unfortunately are necessary, as getting them will afford you the opportunity to build your credit score and establish good credit for a car loan or mortgage in the future. One of the biggest ways to have wealth and good financial standing is to have an excellent credit rating and to own homes and land. These are how anyone who is anybody has obtained their wealth and if you don’t believe me than find someone that you know who is financially over the top, and they will tell you credit and real estate are their 2 most important and valuable assets.

Go ahead and apply for a few different cards. Try getting one gas card, one store card, one American Express card, and a Master Card or a Visa. If you can do this without racking up debt and get the items paid off in about 2 or 3 months than you are set. With the exception of Amex the other cards won’t really improve your credit rating if you pay the balance in full every month, that is why we suggest American Express as one of your primary cards. It is a big name card, but needs to be paid monthly, so you can’t get too far in over your head. Use your credit wisely and it will serve you well, don’t and you will be forever sorry.

Is it any wonder why so many people in this country are in debt? If you think about it we live in a country that is always in debt, but ironically their debt never seems to count against them in the same way our debt counts against us. Why is that? When we spend more money than we have or than we can afford, we run the risk of losing everything, yet somehow our government overspends and they just call it a “deficit“. Why are they allowed to function at a deficit, but we are not? If you think about it, where do they get the money from when they are spending more than they have? Do they borrow it or just print up more money?

I would really like to just be able to say I am functioning at a deficit this week and move on, but unfortunately no one would think that was acceptable if I said it. Aren’t they really setting a tone for American’s to spend more than they have? I assure you that in other countries the credit card debt is nowhere near what it is in this country, although the trend is showing an increase in debt internationally as well.

As American’s this is a definite time to learn from our mistakes and start taking down our debt. Let’s face it you can live without a new TV or a new car, but can you really live without food and shelter? We need to stop putting things on our credit cards that we really can’t afford and start paying cash. I really think that this is the wave of the future in this country, as I just can’t see how credit card companies are going to continue to lend us money if we continue to not make good on our debts.

Debt is on the minds of many with the rising cost of groceries and gasoline, where will we find the money to go on if the cost of everything continues to rise at the rate it is? How can we avoid debt in the face of this financial crisis? Well, as Suze Orman says, you may not like the answer, but I am going to give it to you straight. The only way to avoid getting yourself into a financial crunch is to CUT BACK. You must do whatever you can at this point to reduce yourself to the bare minimum of expenses. Things like bottled water and coffee from the coffee shop, I am afraid are some of the first things to go. You can brew your own coffee at home and save a bundle. You can get yourself a to-go pitcher from Brita and use that to get filtered water anytime, anywhere. If you can avoid it, don’t put anything on your credit cards, as a matter of fact, try to stop using all but one card and be sure that you are making significant payments on it each month, hopefully paying off most if not all of the balance, not just the minimum payment. Buy a used car instead of a new one, this will save you a bundle. Shop sales, use discounts, use coupons, do whatever you can to put aside some money for yourself. The more you can keep in your pocket and hang on to the better chance you have of riding out these tough financial times. Now is not the time to take elaborate vacations or buy lots of new toys, now is a time of nesting and saving. The trend shows that these tough economic times are not on their way out anytime soon. They are only just beginning and we must be prepared for what comes next. It is time to trade in your gas guzzler for a moped and to start to use a few more store brands. Shop the sales and cut coupons. These discounts if used right can provide you with significant savings. If you can get an item that is on sale with a good coupon you can save a few dollars per item, and this kind of savings especially in a big family can really add up.

It may be tough at first and a little bit shocking to the system, however, over time you will be ahead of game and will be glad that you took these steps to cut back sooner rather than later.