Beware of Increasing Your Credit Card Debt

According to the Federal Reserve Bank of New York, consumer debt in the United States currently totals $3.898 trillion, a 7.6% increase from the previous year. And average consumer debt is approximately $11,880 per person.

Much of this debt belongs to people who use credit wisely. However, a considerable amount is owed by people whose credit obligations are out of hand.

Consider This Example

A couple whose collective take-home pay exceeds $6,000 a month has more than $50,000 in debts, and their method of payment is to reimburse only those creditors who call them.

A combination of events may have led to the debt. Perhaps, they borrowed a sizable amount for home improvements or they needed a new car, which could have added $20,000 to their growing short-term credit debt. When other bills piled up and they needed cash, they may have been tempted to use their credit cards. If their credit card debt exceeds $10,000, they could be approaching short-term debt levels beyond their annual cash flow – a dangerous financial position to be in.

Develop a Plan for Debt

Unless you develop a plan for paying debts, frustration and bad credit can easily result. By developing a worksheet, you can begin to address your credit obligations.

Include the names of your creditors, the dates you last paid them, the annual interest rates being charged, the minimum monthly payments and the total amount due. Be sure to note all consumer debts, with the maturity dates for any non-revolving charges, as well.

When you write down the interest rate of each loan, check to see if any of the interest rates are more than the after-tax return on your invested savings. If they are, you have a “negative interest spread” you would be wise to pay off these loans out of your savings.

After you’ve totaled your monthly debt obligations, calculate the percentage of your take-home pay they represent. If the percentage is higher than 15 to 20 percent, you are in danger of overloading your short-term credit.

Consider following these three steps:

  1. Resolve not to charge, but pay cash. Impulsive buying patterns wreak havoc with budgets. Wait before purchasing, and you might find you don’t really need the item.
  2. Deal with high interest credit cards by transferring debt to a card with lower rates, saving considerably, or apply for a home equity loan for debt consolidation.
  3. Resolve to schedule a payment plan to liquidate the new card or home equity loan within 18 to 24 months.

Avoiding long-term debt demands self-control, but if you create a budget and adhere to your line items, you will be well on your way to success.