How To Avoid Credit Card Debt

10 causes of bankruptcy from credit card debt you should avoid.

By Mory Brenner, Esq.

While in my dreams people will read this article and avoid credit card debt that might lead to trouble in the first place, I know that many more go through the following list recognizing the behaviors that indeed saddled them with excessive credit card debt. This installment of credit card debt help examines the habits that emerge as underlying causes of chapter 7 bankruptcy from credit card debt and seeks to aid people in avoiding these pitfalls before they create a problem. In the alternative the information helps to alert and educate consumers who may not even realize what direction they may be heading in so that they can change their financial ways and avoid future credit card debt. For many this list serves as a series of mirrors, with each one you find your reflection you discovered a spending pattern you must change to insure you never fall back into credit card use that might overwhelm you.

Using credit cards can turn into an addictive pattern as powerful as drugs or alcohol. Some know this, others remain in denial. Certain cases stem from a simple lack of education which changes with knowledge. Limited choices might mean selecting one of these damaging routes actually stood out as the best path. No matter how you might have reached a point where you engaged in one of these destructive ways of spending the main thing remains to not repeat these practices in the future, including avoiding situations that even placed you near a situation where resorting to these techniques became a choice.

1. Using credit cards to pay other credit cards or incurring more debt to pay minimums.
While taking a cash advance from one credit card to pay the minimum payment on another credit card may not lead the field in terms of the number of people who file bankruptcy in the United States, it may take the prize for the worst cause of debt in terms of highest percentage of debtors who engage in a particular practice that end up in very deep trouble or bankruptcy court. Since when you make a payment your credit score remains high it may take longer for people falling into this trap to understand the depth of the problem. In time all credit on all cards gets used up when, as if a gift from above, a new card arrives with more credit because on paper things on a credit report may look fine. In fact, additional credit represents more of a curse because it allows the cycle to continue. It usually takes a milestone to wake up the consumer; in many cases when they hit $100,000 in debt. At that point it's most often too late for anything besides a chapter 7 bankruptcy. If you find yourself even thinking about a cash advance from one credit card to pay the minimum on another credit card you reached a point where you need to pause and review your whole financial picture before the debt escalates into something worse. Note this concept extends to taking any loan or advance to pay credit card debt minimums as well including a huge warning about the dangers of using a home equity loan to pay any credit card debt.

2. Using credit cards to buy things you can not afford or to live beyond your means.
Everyone wants things they do not possess the ability to pay for and observing actors on TV commercials or friends in real life enjoying these out of reach items makes it worse. Credit cards offer the temptation to get things you cannot afford today and pay for them later. The problem comes when you can't pay for them tomorrow either. It compounds when people proceed to buy even more the next day and within a few months they cannot pay for any of it. For other people the trouble arrives not from larger easy to spot purchases like a big screen TV or diamond jewelry but from a long series of small items. Each purchase on its own might indeed mean nothing. A weekend hotel, some auto repairs or even a toaster, but each time the monthly payment comes around and the debtor makes only the minimum payment the debt grows. Sometimes this pattern continues for years, even after it becomes hard to keep up with minimum payments, people fool themselves further into thinking more small purchases won't make thing worse, but they do.

Credit cards provide great convenience but if you buy something you better know exactly how you plan to pay the debt in full. Charging things alone does not pose a problem on its own. For some major items you might elect to take a year or two in order to complete a payback. If the credit card interest remains low enough that might even end up as a smart buy as long as you know your income, expenses and calculated payments needed fit easily into your budget. No matter if you look at large or small items to charge on your credit card, make sure you know just how and when you can bring the credit card back to a zero balance and stick to your schedule. While you figure credit card payments make sure to only include money you know will arrive without a doubt, so forget about potential bonuses, raises and especially gambling winnings.

3. Using credit cards to meet daily expenses.
In the grocery store line you look in your wallet and discover it devoid of cash, they take credit cards and nothing could emerge as better way to save the situation. Have you started down the path of disaster? Probably not, the real issue surrounds why you carried no cash. If a quick trip to the ATM replenished your wallet and you used the credit card because of convenience, great. Problems start when people know the ATM would reject them because their balances hover near zero. Yet, people need to eat and pay the rent and for some folks credit cards remain as their last and only option.

At this stage you need to review why you need money, review how much money you really need, separate wants from needs and examine alternate options to get money. Those in this position should read this article examining WHEN you really NEED money and how to get money even with bad credit for an emergency or financial crisis. Once problems get to this level the seriousness of the issue cannot be overstated. Of course, you need to eat, and if the credit cards still remain as an option they temp their use as an easy option as well as a choice that allows you not to deal with the depth of the problem head on.

People must look at the larger picture. Accruing credit card debt for daily living expenses might work as a short term or stop gap measure. Imagine a person who started a new job but won't receive a paycheck for a few weeks. In this case the debtor knows exactly when and how they can pay the debt incurred by using the credit card for everyday activities and necessities. More often, however, I see people with no idea how they might pay for their credit card usage that resort to the credit cards as they grasp as straws while things collapse around them with no hope for short term recovery. As grim as things may be, people in this spot need to stop and deal with the larger issues rather than using their credit card to merely delay the day when they need to confront those issues anyway. In the end you will be better off and keep more of a chance to rebuild your credit and your life if reach out for public help sooner than later and avoid credit card debt to compound your problems.

4. Using credit cards to live without income.
Some people actually make a conscious decision to use credit cards as a replacement for income. I especially see students without a job and access to credit cards fall into this trap to pay for their daily lives through multiple years of college, some even use the credit cards for tuition. In the beginning they rationalize by thinking once they graduate their new jobs will allow them to pay for all of the credit card debt they accumulated, but by that time the debt grew far too large and only bankruptcy remained. Certainly not the way a new graduate wants to start a fresh life after college. Others fall into this trap too, perhaps they think they will get a book deal or sell artwork or invent a better mousetrap that will make them millionaires. For anyone thinking use of credit cards offers a good way to live until their projected big payday comes I would respond by urging them to outline another plan before they need a class on how to find a bankruptcy lawyer.

5. Using Credit Cards In A Crisis.
Victims from this category always tell a sad story. Perhaps victims of natural disasters or a family crisis, they used credit cards to get themselves through some very hard times until their crisis had passed. Unfortunately at the conclusion of events they realized that the debt accumulated became insurmountable compounding the original tragedy with a bankruptcy filing.

Especially at the start of a crisis, events happen fast and without time to plan credit cards become a fast easy way to deal with the financial portions of the emergency. Before you did a hole too deep to escape from, look for other options. For catastrophes on a grand scale public help may emerge as a choice. As horrible and crazy as things might be, take a moment if you can and explore other avenues before using credits card debt that, in the end, extends an emergency into many years of lingering financial hardship.

Let's take a moment here to include smaller calamities as well. Perhaps you suddenly need major car repairs or a new roof. With no other way to pay for it credit card debt rears its ugly head again. This really leads to trouble on a grander scale when it becomes repeated behavior without the ability or discipline to repay the original debt. It might unfold like this: A dental emergency come up without insurance, the person charges the work on credit cards but proceeds to only pay minimums on the bill never reducing the debt. Six months later they need a heating system and charge that too. Maybe they pay more than the minimums and pay all of their regular purchases but never really make a dent in paying off the larger surprise bills. The next year the car transmission fails and this pattern continues until they need help from a bankruptcy attorney.

To avoid problems like this look back to your spending and budgeting long before anything bad happens. Put away money for emergencies as a part of your cash distribution every month. I like to see people with enough savings to pay all of their expenses for about six months. Such a rainy day fund can be used for home and auto repairs or for cases of job loss too. For those living "hand to mouth" I would suggest looking harder at ways to save. That might mean cutting daily expenses even more or changing where you live. People always resist moving to a cheaper home or apartment, but sometimes making a tough choice before something bad happens proves to be great planning. You must prepare for surprise events in your budget, I guarantee you the question is not if they will occur only when they will occur.

6. Credit Card Debt Remaining After A Change In Life Circumstances.
By definition bankruptcy from residual credit card debt after a major change in life circumstances hits the debtor with a most nasty double whammy. Credit card debt accrued in these cases starts innocently enough, perhaps even through responsible spending. Many of these situations start off with a combination of high credit card debt and high income with payments current and things looking fine.

Suddenly without warning something horrible happens to change the lives of the debtors forever. The event represents something dramatic and permanent like a serious injury preventing someone from ever working again or death of a wage earner in the family. Sometimes divorce falls into this category too, even though both parties get to walk away breathing. With the income source gone leaving no way to pay the credit card debt sometimes bankruptcy remains as the only choice.

Since no one ever knows the schedule of an unexpected tragedy and the credit card debt level looked acceptable prior to the disaster how does anyone prevent this from happening to them? First don't accumulate so much debt that a major income change will result in big trouble even if your current job supports the payments. The other thing to potentially consider if you already owe the debt or you can't avoid the debt might be insurance. You could need life insurance or disability insurance, perhaps even mortgage insurance, another tough aspect of this situation is you can't buy insurance to cover every potential problem. Therefore I advise avoiding debt rising to any level that one spouse could have trouble with if the other encountered an emergency or the couple splits.

7. Allowing others to use your credit cards.
People with good credit allow others to use their cards in various ways. Perhaps they buy something for them with the promise to be paid back, or even take a cash advance for them. Especially for children or living companions people offer credit cards with the trust that the person would never abuse the privilege. Most times the situation works out just fine. The rare cases end up forced to review the differences between chapter 7 and chapter 13.

To completely eliminate this risk you could always follow the path of never allowing anyone else to use your credit card and especially never issuing anyone their own credit card for your account. For those who would rather place more trust in their friends and families or need the convenience of granting another access to a credit card keep these things in mind:
a. Giving someone your credit card makes you the bank, be 1000% sure they can pay you back or be prepared to pay all credit card charges by yourself. In the end you stand as the only one the credit card company will chase for the money.
b. Using your card to buy something for another person or giving them a cash advance from your credit card represents you acting like a bank even more than the example above; make sure to establish a firm plan for payback before the charge.
c. Things change. Your boyfriend or girlfriend or even fiancÚ can become your ex at any moment, especially when you least expect it. Collecting money they used for themselves on your credit card ranks as hard to impossible to collect when they resist payback. Even if you wanted to drag them into court they might say all credit card purchases represented gifts.
d. People you trust might disappoint you. Children can use money irresponsibly or even get into trouble with drugs or drinking. Spouses might develop major spending problems. People with credit cards from others often see them as endless access to goods and services because they do not pay the bills.
e. Outright fraud does exist and you must look out for it. Con men (and women) look for people with access to money and credit cards they can steal from. You don't need to be a millionaire, only a soft mark for these criminals.
If you must engage in allowing others to use your credit cards you must at least proceed in a more prudent fashion. Put limits on spending for goods and I would suggest no cash advances. Look for patterns that might represent trouble like sudden increases in use of the credit card. If the person is supposed to be paying you back make sure they live up to their promises. Do not be afraid to cut someone off or take away their credit card privileges until things straighten out. Never allow charges to get so high that you could not repay all credit card debt on your own without hardship.

8. Using credit card debt to fund a business or investment.
In most cases obtaining a credit card comes easier than finding a business loan. Many people determined to start a business from a position where banks denied their loans yet their pocket bulges with credit cards resort to credit card debt as a substitute for a business loan. Sometimes people might start a business and use credit cards to fund inventory. In other cases people use credit cards as a bridge through a bad spell. Occasionally credit card debt used responsibly for everyday use becomes a problem if the business suddenly collapses.

Let's start by going over the reasons not to use credit cards to fund your business:
a. Credit card debt generally carries much higher interest rates than regular bank loans.
b. You may or may not end up personally liable for business debt if a corporation or LLC goes out of business, but unless you created a very large corporation bank almost always require a personal guarantee on business credit card debt.
c. Credit card limits might mean the promise of an underfunded business even before things open.
d. Cash advance fees may compound the high interest rates.
e. Most new businesses fail, using credit card to fund a business almost insures that if the business fails the credit card holder will end up looking for answers to bankruptcy questions.
Starting a business with cash from savings represents a better bet from a debt point of view. If you need debt to start your venture try a bank loan. For those with an established company think carefully before using credit card debt as a bridge loan. As painful as closing the business might be, it may end up as a better option than closing it a year later and needing a bankruptcy because of your credit card debt too. If you do use credit card debt for your business try to pay it off as fast as you can.

9. Accepting credit card offers as a proper decision.
Clients used to come into my office with piles of credit card bills that made chapter 7 bankruptcy their only way out. After reviewing their finances I might ask "Why did you get these credit cards in the first place when you clearly can't afford them?" The number of people with this answer would surprise you: "We didn't think we could afford a credit card either, but the bank sent us an offer in the mail that said we were approved for a credit card and those people know way more about money than we do, so we figured we really should get a credit card." The same logic leads them to take several credit cards and soon the debt overwhelms them.

Pre-approved credit card offers represent marketing gimmicks as much as credit decisions. Even when some evaluation went into the process it likely came from a computer model. These banks making pre-approved credit card offers do not really know about your personal finances. If you think a credit card would lead to trouble do not get one. If you think a credit card might lead to temptation resulting in problems don't enroll for one in the first place. If you need a credit card for the convenience it offers for daily living but worry about paying the debt think about a secured credit card even if you get offers to apply for standard credit cards. Even with bad credit, credit card options exist, and many come with built in spending restrictions.

10. Ignoring small credit card debt trouble.
Many people overspend a bit. When they catch up in a few months things work out fine, perhaps this pattern even repeats frequently, but that alone rarely brings about a bankruptcy. More often a bankruptcy lawyer sees people who overused their credit cards by a little but never caught up. Instead they bought too much on their credit cards again 6 months later before they resolved the first incident. The pattern might continue for many years, with each episode representing something they could easily overcome with a more concerted effort. In 10 or fifteen years they tell stories about how things just grew out of hand to $50,000 in unmanageable credit card debt. Not dealing with small credit card debt issues can turn ugly for compounding interest build up too.

When you have trouble making payments you need to act sooner rather than later. Read this guide for timing to reach out to a debt professional (reprinted from Bankruptcy Alternatives):

When the FIRST of the following occurs:

1. Any payment gets more than two months late.
2. You used a cash advance from a credit card to pay another credit card.
3. You needed a credit card to pay for basic living expenses like food because you had no cash or money in a checking account.
4. Any loan is "called" or accelerated by a creditor.
5. You receive a foreclosure notice.
6. You have drawn down your savings for daily living two months in a row.
7. You have experienced a disastrous financial setback, such as having major surgery without medical insurance.
8. You are experiencing some of the "grief" symptoms discussed in the lifestyle section, from your debt situation.
9. You see trouble on the horizon even if you are current with everything.
10. You think perhaps you should.

Doing nothing about credit card problems but hiding your head in the sand rarely emerges as the best way to deal with your debt, and often it directly precedes bankruptcy. Just because you get some advice does not mean you are a bad person or you failed at anything. Credit card debt brings with it some depression and psychological issues that prevent people from wanting to deal with the root of the debt issue, but you need to explore debt help that might be available sooner rather than later.

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