Long before credit card debt balloons to the point people need to find a bankruptcy lawyer small purchases, which seem innocent at the time, begin to accrue. By paying careful attention to personal finances and consumer spending right from the start credit card debt problems may be avoided. The following information and tools should help keep you out of serious credit card debt trouble if you read them and follow them before debt problems spiral out of control. For people already deep in major credit card debt this information should help you erase to root causes of the trouble.
Personal Budget & Daily Spending
I quickly learned, after a parade of chapter 7 bankruptcy clients with the same issue, that the root of debt problems for many people stems back to their failure to understand their own personal spending. Debtors came into the office with a concept of their own budgets in their minds, some even calculated them on paper or budget spreadsheets. In every case the budgets balanced and yet the people accumulated thousands of dollars in consumer credit card debt. When asked how they got into credit card trouble I got answers like "I don't know." or "We can't figure it out." or just a sad puzzled look. Some would even present their printed budget and try to deny a spending problem existed, but the pile of unpaid credit card bills squelched any such argument.
The evidence made the culprit easy to identify and not even too hard to analyze. Correcting future spending behavior and dealing with the current credit card debt presented the greatest challenges. As much as people in this situation thought they understood their personal finances, in fact, they had no clue where their money went and in reality spent far more than their budgets indicated. In time I developed a method to get to the real truth of their budget and later made a free computer system to help people through these overspending issues, feel free to use this budget analysis tool. In most cases the people knew their major expenses such as rent or a car payment, maybe they even thought about utilities or insurance, but soon after small and medium spending dropped from their radar. When they ran out of cash they resorted to credit card debt to fill in the gaps. In the end their only choice became chapter 7 or chapter 13.
Using a bit of logic and math we can figure out what a person really spends. I encourage anyone who even thinks this situation resembles their own to use our special budget calculator. Start by entering all information requested, basically what you think of as your household budget. The automated budget system starts by making sure you accounted for everything you spent. For the particular budgets we are discussing here most people fail to account for all of their expenses. If indeed you fall into this category the budget program will warn that "You have not accounted for all your expenses." Look at the list for suggestions on the personal budget form, review each day in your head and think of where you spent money. Enter your new expenses and calculate and analyze your new numbers. Most people will need to repeat this process several times until they stop seeing warnings about not including expenses. Once an accurate consumer budget flows through the system you see the next level of analysis, for example "You live beyond your means." From there you figure out where to cut expenses so that you can maintain a proper budget without debt. For more help with the personal home budget page use the tutorial.
The main lesson here stands as don't spend more than you take in. Most people know they need to follow that rule, they just don't understand when they aren't. In some cases they fail to recognize the problem for years. If you see bank balances slipping or credit card debt rising, don't become another statistic. Deal with your credit card debt and spending problems before they get worse.
Certain people need to come to grips with a broader issue when the root of their budgeting and spending trouble starts with compulsive or addictive behavior like being a shopaholic or spendaholic. Further examination of these destructive habits occurs later when discussing people who might want to cut up credit cards and never get new ones, but let's state now that these represent real and serious addiction problems and that people partaking in compulsive shopping habits or chronic overspending should seek counseling for those issues in addition to professional debt help.
Always Have Plans For Credit Card Debt Payback Before Spending
From the moment you open your wallet and pull out that plastic charge card you should know how you plan to pay for the items on the sales counter. In a perfect world you pay your credit card bill in full each month without hesitation or problems and this information becomes a moot concept. Most people reading this article don't use credit cards in anticipation of that fast a payback. Failure to pay consumer credit card debt in full each month in itself should not cause concern as long as you know when and how you will pay back the money in a reasonable period of time and you stick to your personal repayment plan.
Let's start with an example of responsible credit card spending. A couple needs a new refrigerator, a purchase that appropriately stands in the true necessity category. After research they find one without frivolous features on sale. Remember part of getting the money you need involves adjusting your "needs", you do not need a fridge with a TV in the door, just something reliable to keep food cold. If an acceptable model comes with a cheaper price from a good store buy it there and save some money in that way too. For this example assume our consumer spent $500 for their refrigerator and charged it to a credit card. They hope to pay $50 toward their consumer debt each month until they paid off the credit card charges in full; they budget that in 15 months they should be debt free. You might ask: "15 months! Why not 10 months at $50, that's $500?" Many people get into debt trouble through a combination of not understanding the true cost of personal purchases and fooling themselves into thinking they can afford things they should not buy. Right off the bat with 5% tax our cost actually starts at $525, now even at a $50 per month pay back at 15% interest it will take 12 months and really cost $566.31 including interest. Get a feel for the true cost of charged purchases by using the debt calculator for number of months to reduce a balance. Now some harsh reality checks, our couple knows they have a tight home budget and things will happen. They expect right from the start that two months they might only be able to make half payments and one month they may need to skip a credit card payment other than the minimum. Exact numbers would depend on which months they paid less, but averaging things and using the calculator for credit card repayment we see a 15 month payback cost our couple $579 with interest.
Contrast this example with an opposite pair of consumers with poor personal spending habits. First off they bought a model with cold water built into the door and an ice maker; in addition they ignored the sale at a nearby store so they paid $900 at the merchant with the big ad and the high price. To compound their overspending they not only forgot to take into account the tax but they never figured in the cost of the plumber to hook up the water line needed for their special accessories. They charged to $150 plumbing bill on their VISA too, so the personal credit card debt starts at $1095. We'll figure the same interest rate for now except these folks mostly just pay the minimum on their credit card bill each month, but eventually they pay it off in 6 years. In they end they spent $1666.80 to keep their food cold including interest, almost triple what a couple with more responsible consumer spending habits paid.
Let's make this worse by switching from a refrigerator to a new computer, but leave all the numbers the same. Imagine every three years the original computer needs replacement and the process starts again. Let's look at the larger picture for figuring the computer purchases represent the only credit card spending from these consumers. Couple one buys a new computer in the same way they did they first time and couple two sticks to their buying patterns too. In the 8th year our thrifty couple laughs and enjoys their third computer free of any credit card debt with a total spend of $1739 assuming they always pay the same for the computer. When year 3 arrives for our overspending couple they buy the second computer, but they still have to pay off the first one even though it's useless. The second computer increases the credit card debt and lengthens the payback time. In year 6 they need the third computer and they never even paid off the first one. Using a constant average payment from the first refrigerator example at the 8th year the couple headed for financial trouble paid $1944.60 to the credit card company and worse than that they still owe around $2700 in credit card debt. Have I got your attention? Because I'm just warming up! When will our problem consumers pay off that credit card debt with a constant payment of what they budgeted from the initial purchase? NEVER! By the third round the debt compounded to the level that their original credit card payment no longer even covers the interest. Imagine at that point they realize they need help and stop buying anything and just pay off the credit card debt, a six year payout like their original concept would raise their credit card payment budget to nearly triple what they started with and a 15 month payout like couple one would cost over eight and a half times what they originally planned to spend on their credit card debt. Make it worse by figuring they do this with 10 other purchases each on a three year buy cycle. Running down the path to financial ruin? Let's jump right off the cliff by figuring you charge groceries without a responsible payback plan with only a 1 week replacement cycle!
Personal Finances Emergency Preparedness – Using Savings Money For Credit Card Debt
People all need to anticipate unusual expenses out of the blue without warning. It might take the form of emergency auto repairs or a medical issue or a problem with a family member, but no matter how much you hope nothing bad happens, at some point your number comes up. On one hand I like everyone to keep at least six months of savings on hand for an emergency and you can read about this in depth in the Personal Finances Emergency Preparedness article, but with our topic today specifically centers on credit card debt we will concentrate on using savings for paying credit card bills. As you better understand cash allocation during a personal financial crisis you realize that using emergency cash for paying credit card bills at all represents a solution for people with short term or mild debt issues. For those facing foreclosure it may be time to put aside paying the credit card bills and accelerate efforts on mortgage payments. This becomes the first issue for withdrawing savings for credit card debt; review the larger long term picture.
1. Is your current financial problem temporary or permanent?
2. Exactly how long will this crisis last?
3. Will you be able to salvage the credit cards in the long run?
4. Can you prevent ending up with bad credit anyway?
5. Are more important payments in danger like a home or car?
6. How much savings would remain if you spent some on credit card debt?
If you experience a relatively minor problem and see things turning around quickly go ahead and use emergency funds for credit card debt, especially in cases where your savings exceeded six months of living expenses.
People may need to treat any use of emergency money as a wakeup call. Is the issue really minor or a symptom of larger problems? Will things truly get better or are you avoiding the truth about the debt? One of the worst things people regret turns out to be wasting money on credit card debt payments when they end up losing the credit cards anyway and the money thrown away in a failed attempt to keep credit cards could have prevented foreclosure on their home.
This argument becomes even stronger when talking about taking money from retirement savings such as an IRA or 401k. On top of the issues comparing using savings for credit card debt instead of mortgage debt you likely incur a penalty for early withdrawal, but more importantly, if you end up using bankruptcy as your ultimate debt solution your retirement money would likely have fallen under the federal bankruptcy exemptions or your state bankruptcy exemptions meaning you can keep it even in a chapter 7 liquidation bankruptcy. Why pay money you can use to live post bankruptcy to pay credit card debt that will all be discharged anyway? I'm not advocating everyone file bankruptcy, in fact, I promote bankruptcy alternatives whenever possible, but when good bankruptcy advice dictates bankruptcy as the end result, you should try to maintain any money you can, in any format or savings vehicle, for your post bankruptcy life.
Spending cash during times of personal financial crisis
When money gets tight how you spend what little you hold on hand often determines if you end up pulling out of a tailspin or headed to bankruptcy court. This subject breaks into two distinct parts, spending on purchases for things you buy and bills you pay for previous purchases. Let's concentrate on buying here. First of all, stop using credit cards for new purchases and especially cease all credit card cash advances. Besides the fact that continuing credit card usage digs you deeper into debt, using a credit card after you think of bankruptcy as a solution might cause a judge to deny a discharge if you end up filing a chapter 7 or chapter 13 and in extreme cases you might even face criminal fraud charges.
To preach "reduce spending" in these cases stands as good advice, but that doesn't go far enough for people very deep in debt. Eliminating expenses other than necessities makes a better recommendation but just touches the surface for many cases. The people I refer to specifically here generally used credit cards to support living beyond their means for so long they can't even start to formulate a budget without credit card debt. No matter what they want, the day of reckoning will arrive soon. At some point the credit cards will max out. These folks come in to get bankruptcy information and know they must file and, as a further result of the bankruptcy, their credit cards will no longer be available, but they never stopped to think about the fact that they only maintained their daily living through using credit card debt and that post bankruptcy they must live without anything filling the gap. Before examining what to do most folks need to go through some denial about their debt problem and how serious the root of their problem extends. Eventually they understand what needs to happen and make the appropriate changes no matter how dramatic or painful. At this point I'll include a list of daily expenses to cut, for people with moderate credit card debt trouble it might solve the problems but for most debtors in this group even cutting nights out, vacations, expensive groceries, high priced clothes, cell phones, cable bills, lunches out and just about anything else they used to buy with credit cards every day fails to really address the true issues. Credit card debt for these people often emerges as a side effect of their main overspending. As much as they resist the suggestion, people in the quagmire of credit card debt and other debt this deeply need to explore more significant life changes. Most of the time the only cure for saving these debtors involves trading down expensive cars for cheaper ones and/or moving to a cheaper place to live and/or pulling children out of private school. People abuse their credit cards and run up six figures of debt, but the driver of the behavior may stem from the fact that after high mortgage, tuition or car payments the people run out of money before they start looking at regular daily expenses. At that point they fall into a habit of using credit cards for their regular living items and a debt monster is born.
For most people who find themselves with credit card charges well past the point that debt settlement can help them a wake up call, some education and a major change lifestyle leaves them ready to move forward. As hard as those steps might be in adjusting future personal spending habits, some people start with even more deep rooted problems. Rather than just a victim of bad budgeting and financial planning their problem may come from a psychological issue like compulsive spending or a shopping addiction. People need to take a hard look at their own spending habits and if they seem like shopaholics they should seek professional counseling.
While people I talk to in need of learning these lessons most grasp how they lived and the ways that their future must change only after they required a bankruptcy attorney, I sincerely hope that some readers here recognize themselves and their behavior long before their credit card debt builds to the point it calls for bankruptcy information.
For a much more complete discussion of which bills to deal with when funds get tight read " Who to Pay When You Can't Pay Everyone". As a general rule pay the most important expenses first. That means pay the mortgage before the credit cards. People that reach the point where overwhelming debt means they skip paying bills face a longer period of time to recover and failing to pay all bills remains a part of life for a while. With this in mind, figure whichever bills you stop paying represent services you will lose and ask yourself "What would you keep?" The most common question becomes "Do you want your house or your credit cards?" and most people respond by selecting their home. The answer for what debt to address and what debt to postpone becomes easier when examined in that way.
While making these decisions debtors must take a hard reality check as well. People often waste limited valuable resources in failed attempts at retaining items they are surely destined to lose. This might mean making credit card payments when no hope exists to save the credit cards or making car payments when repossession lurks around the corner or paying mortgages when you know foreclosure represents the final outcome.
Individual cases may have strategic reasons for short term spending on these items like keeping credit up while replacements get secured or as an intelligent viable alternative to losing the asset. For an example of this second type think of people who own a house with a first mortgage of $200,000, a second mortgage of $150,000 and a value that plummeted down to $210,000. Imagine paying both mortgages remains impossible and foreclosure someday inevitable, paying the first mortgage without the second fits the budget, but that means losing the house eventually. If the first mortgage payment alone looks cheaper than alternatives like a smaller home or renting the debtor may elect to pay only the first mortgage and intellectually start to treat the whole situation as a rental. In my example the second mortgage holder might not even bother to foreclose until it looks like more equity builds in their position. You might gain the option for a chapter 13 bankruptcy with a cram down if the market drops further. Paying only the first mortgage buys time and, if it costs less than the alternatives, it prevents the additional turbulence of a move and leaving a long time residence.
Best credit card selection and making changes as personal finances evolve.
Credit card applications take many forms like no interest, rewards or personalized graphics, each person must figure out what variety fits their situation and then make sure as their life changes they adjust their credit cards if they have the opportunity. Rather than talk about what constitutes the "best credit card" let's make some assumptions to address likely issues. People I'm most concerned with for this article involve people in danger of trouble with credit card debt. As a consumer the credit card variable to shop for mostly concerns interest rates. When people get in trouble with credit card debt the interest compounds the situation. Comparing credit cards when first selecting which card to apply for, pay close attention to the rate. If rates come in very close, comparisons can extend to annual fee, rewards or graphics, but none of those will contribute one way or another to easing or expanding a credit card debt problem.
In a perfect world I would talk about switching credit cards when you find yourself with high debt and high interest, but once most people get into credit card trouble their credit score already leaves them without that option. Therefore to insure a good rate when you need it, application time must be the opportunity to look. Make sure to not only pay attention to the standard APR but watch out for rates that jump up to 24% if you make a late payment. For people with the foresight to see the debt trouble before a drop in credit scores a balance transfer to a zero interest credit card can provide an option to further preserve your credit. As with most debt problems, recognizing an issue early provides consumers more ways of tackling it.
An article about what to do or not do with credit card debt and your situation degrades must include a warning about home equity loans. Banks and mortgage companies love to brag about how their debt consolidation loans reduce interest rates and combine all of your credit card bills onto one easy payment with lower rates. While every word rings true, people also need to know the dangers paying credit card debt with proceeds from a debt consolidation loans. Since most of these loans take the form of a second mortgage the action essentially converts the consumer's unsecured debt to secured debt. Before you even think about this option read the complete frequently asked questions and answers about debt consolidation loans for credit card debt and why it can start a fall of dominos that ends with people looking to avoid foreclosure.
Removing Credit Card Debt Temptation For People With Chronic Bad Spending Habits Or Shopping Addiction
After a complete review of your budget and reflection on your spending habits and a bit of courage you can review some trends to your spending personality. Do any of these
1. Money burns a hole in my pocket; if I have it I spend it.
2. I don't think about money or budgets, if I want it I get it.
3. If I don't have cash I use a credit card without thinking about payback.
4. I feel addicted to shopping or feel depressed if I can't shop.
5. I buy things I often don't need or don't ever use what I buy.
6. When I feel down I shop and feel better or get a rush from buying things.
7. Family or friends are concerned about my shopping habits or I lie to them.
8. I don't worry about buying things today if I pay in the future.
9. My bank balance is something I never look at.
10. A bankruptcy resolved my credit card debt in the past.
11. Taking a home equity loan paid off credit card debt.
12. I don't have a job or any way to pay back credit card debt.
After 10 years of practicing law representing people with foreclosure and credit card debt issues I can state that some people should not own a home and some people should not carry a credit card. Certain folks might move from these designations with proper counseling and education, but some people should just never expose themselves to the dangers like some alcoholics should never touch another drink. Most clients don't want to hear this advice even when it fits them perfectly. I rarely talk to people who failed my new home buyer course that voluntarily consider maybe owning property doesn't mix with their spending habits and lifestyle. Some think credit cards count as something everyone should get like air or water. Others understand that their personal behavior dictates that no credit cards represent the best option. It won't make you less of a person to follow one of these tough roads; it will only help you in the long run and pave the way for a better life. People who engage in compulsive shopping from a spending addition should count themselves in this group as well as people with such poor personal finance habits that they need to avoid standard credit cards to save themselves from getting back into serious credit card debt. Let's examine a few choices other than using unsecured credit cards.
1. Never get a credit card or cut up all of the credit cards you have.
If you experienced major credit card debt trouble more than once or count yourself as a chronic shopaholic you need to at least examine never holding a credit card again. Think of trouble as anything that necessitated a credit card bailout including chapter 7, chapter 13, debt settlement, credit counseling, a debt consolidation loan, help from family of friend because you needed money to pay credit card debt or anything other than making payments from your income. Some folks after reading the warning signs or more limited debt experiences will feel they need to assign themselves to this group before they encounter multiple credit card debt disasters. Anyone thinking that way should probably go with their intuition and either avoid credit cards or try one of the other options below first.
2. Get a secured credit card or prepaid credit card.
Secured credit cards help people with spending concerns because they put preset limits on what you can charge. In very basic terms they prevent you from debt trouble by not allowing you to get in any debt. Yet, these cards allow you to maintain the conveniences of a credit card and the social status that can come with a credit card. For more details on these options you should read about both secured credit cards and prepaid credit cards.
3. Use a debit card or checks.
These financial tools make it easy to access your checking account, but nothing more than your checking account. Overdraft protection changes the story, but people with habitual credit card debt issues or spending addiction should treat overdraft protection like credit card debt and not take it if they might abuse it. These products still pose a danger in that they potentially allow someone, especially a compulsive shopper, to drain their account to zero if they make bad decision. You can read more about debit cards or comparing secured credit cards to prepaid credit cards or debit cards.