Understanding Credit Debt

Understanding Credit Debt

Credit card debt can be a blessing and a curse. Managed correctly, you can actually make money using your credit cards. However, credit cards are also the easiest type of debt to mismanage, and one big mistake can put you neck-deep in financial difficulty. This guide will teach you how to deal with credit card debt and stay out of trouble.

Fantastic Plastic: Choosing and Using

You probably have several types of cards in your wallet. Here’s how they work, and how to choose one.

Charge Cards

Charge cards offer a convenient way to pay without incurring interest expense. You use them as you would a credit card, but you pay your balance in full each month.  If you’re in the habit of carrying balances, switching to a charge card can help you control spending. In addition, charge cards often come with nice rewards or cash back programs for their cardholders. Many businesses use charge cards for the cash back and to track their spending.

Debit Cards

Debit cards do not extend credit either. You use them like a credit card, but instead of advancing funds, debit cards deduct the money directly from your bank account. They offer convenience without the potential for abuse. Debit card accounts are not reported to credit bureaus, so using one cannot improve your credit rating.

Secured Credit Cards

Secured credit cards require users to deposit a sum with the card issuer in case the bill isn’t paid. The deposit can be as much as the entire credit limit, or it can be smaller. These cards can come with high fees, and are primarily marketed to those with very poor credit. Not all secured credit card accounts are reported to credit bureaus, so if you’re getting one to improve your FICO score, make sure that the company reports your payment history.

Rewards Cards, Cash-back Cards and Travel (Miles) Cards

These are all credit cards that reward you for using them – in merchandise, cash or airline miles. If you don’t carry a balance, and the value of the rewards exceeds the annual fee, you can make money by using them for everything from gas to groceries to furniture. However, they can be minefields for those who tend to overspend and carry balances – consumers who don’t need encouragement to break out the plastic.

Balance Transfer Cards

Balance transfer credit cards are designed to pay off other debts with higher interest rates. Often they have a zero percent introductory rate, good for up to 18 months. This can be really helpful if you’re trying to erase some pesky balances, as long as you refrain from additional charging. There is usually a fee for transferring balances (often, three percent), so run the numbers before signing up.

The type of card you choose depends on your credit rating and objective. If you tend to carry balances, skip the rewards cards in favor of one with a lower rate. Balance transfer cards can be useful for consolidating higher interest cards and paying them off. Secured cards can be appropriate for those building or rebuilding credit, and charge cards are smart choices for those who want to avoid carrying a balance, or for business expenses.

When choosing a card, compare offers from several issuers and select the one with the best terms for your usage pattern. Credit card costs can include annual fees, interest (including introductory and default rates), cash advance charges, foreign transaction fees, over limit fees and late charges – review the dreaded fine print to avoid ugly surprises.

Credit Card Customer Rights – the CARD Act

Credit Card Accountability, Responsibility, and Disclosure (CARD) Act protects consumers in several ways:

  • Your rate on existing balances cannot be increased unless you miss two consecutive payments.
  • Your rate cannot be increased for new purchases without 45 days’ notice.
  • Late fees must be reasonable.
  • Payments must be due on the same day each month.
  • Over-limit fees can only be assessed if the cardholder has expressly authorized the issuer to process the excess charge.
  • Issuers must disclose the long-term cost of paying only the minimum payment.

Credit Card Problems

Credit cards can sometimes get you into trouble. Here are some warning signs to let you know that you need help:

  • You have maxed out at least one card.
  • You can only afford the minimum payment.
  • You use credit cards to pay other bills.
  • You’re missing payments.
  • Your monthly debt payments (excluding housing) exceed eight percent of your monthly gross (before tax) income.

Paying Off Credit Card Debt

There are several ways to clear your credit card balances, depending on how serious your problems are. Here is a list of the most common methods, with links to fuller explanations of each solution.

  1. Waterfall Method- A sensible Do-it-Yourself Strategy
  2. Balance Transfers-  A good solution if you have strong credit and can pay off the debt aggressively
  3. Credit Counseling- A professional solution ideal if you are struggling with high interest rates and don't need lower monthly payments
  4. Debt Settlement- A way out debt with a lower monthly payment and lower overall costs for people struggling to make their current required payments
  5. Bankruptcy- Difficult to qualify for and remains on your credit report for up to 10 years, but could clear out debt in the shortest time for people who qualify for Chapter 7

There are many solutions to excess credit card debt, and at least one will probably work for you. However, no credit card debt help will be effective unless you address the underlying problem that got you into debt in the first place.