Dealing with credit card debt
It's dangerously easy to fall into debt. You may be making more money now than you ever made before. But you've probably got more expenses too. That's a dangerous combination. It's far too easy to spend a lot more than you actually have. And that can lead to trouble with debt.
Of course, getting sick, losing your job, and other things beyond your control can also land you in debt. But there are ways to prevent debt problems, as well as ways to improve your situation if you do get into trouble.
|Budgeting||To start dealing with your credit card debt, take a close look at your monthly spending and pinpoint some areas where you can cut back to free up more money to repay what you owe. Then make repaying your bills monthly a priority - not an afterthought.|
|Stop impulse buying||Go to the store when you need something specific. Try not to go shopping when you are feeling down or depressed and are looking for a "pick me up". You'll tend to buy things you don't need. And throw away all those flyers and ads for things you don't really need.|
|Call a halt to new charges||The first rule of paying off credit problems is also the simplest - don't take on new debt. Once your credit card debt is paid off, try to pay off all new credit card charges in full when the bill comes.|
|Pay on time, pay more than minimum||Always pay your credit card bill on time to avoid late payment fees. While paying the minimum keeps you out of trouble with creditors, it is more costly in the long run, since you will always be paying interesting on a large amount, which doesn't decrease very rapidly.|
|Read credit card statement carefully||Check your credit card statement to make sure each purchase is yours. If you are charged for any purchase you didn't make, phone the credit card issuer immediately and follow up by sending a letter. Mail your letter separately from your payment.|
|Further information||To start dealing with your credit card debt, take a close look at your monthly spending and pinpoint some areas where you can cut back to free up more money to repay what you owe. Then make repaying your bills monthly a priority - not an afterthought.|
|Method||Stop impulse buying|
|Further information||Go to the store when you need something specific. Try not to go shopping when you are feeling down or depressed and are looking for a "pick me up". You'll tend to buy things you don't need. And throw away all those flyers and ads for things you don't really need.|
|Method||Call a halt to new charges|
|Further information||The first rule of paying off credit problems is also the simplest - don't take on new debt. Once your credit card debt is paid off, try to pay off all new credit card charges in full when the bill comes.|
|Method||Pay on time, pay more than minimum|
|Further information||Always pay your credit card bill on time to avoid late payment fees. While paying the minimum keeps you out of trouble with creditors, it is more costly in the long run, since you will always be paying interesting on a large amount, which doesn't decrease very rapidly.|
|Method||Read credit card statement carefully|
|Further information||Check your credit card statement to make sure each purchase is yours. If you are charged for any purchase you didn't make, phone the credit card issuer immediately and follow up by sending a letter. Mail your letter separately from your payment.|
Ever wonder whether you are managing your debt properly?
If you answer YES to any one of these questions below, it may be time to cut back on your use of credit. If you answer YES to two or more questions, it may be time to take more drastic measures.
- Are you at or near the limit of your lines of credit?
- Can you make only minimum payments on your credit cards?
- Is the amount of your new purchases a surprise each month?
- Are you frequently taking cash advances on your credit cards?
- Are you chronically late in paying your bills?
- Are you borrowing to pay for items you used to pay for with cash?
- Are you tapping into your savings to pay current bills?
- Do you put off medical or dental visits because lack of money?
- Do you have savings equal to less than three months of income?
- Is an increasing percentage of your income going to pay debt?
- Are you unsure of how much you owe?
Expect the unexpected
Knowing your finances can help you weather the unexpected. What would you do if you lost the job that provides most of your income, or were disabled and couldn't work? What if your partner died or you were divorced and could no longer count on your spouse's income? How would you handle a poor investment decision that cost you a large amount of money? What if you had elderly relatives who needed your financial help to cover their health costs? You can't plan fully for these emergencies, but you can prepare for the unexpected by knowing exactly where you stand financially.
For the record
It's important to have a firm grasp of your short-and long-term living expenses. To find out how much money you need to maintain your lifestyle, you can review your checkbook, credit-card records, bank statements, loans, and mortgage payments.
Identify all the costs that are essential - food, shelter, transportation, medical - and total those amounts. Then figure out the percentage of those expenses that your income covers and the percentage that comes from various other sources.
While it can be a little frightening for people to realize how threatened their financial security would be if their income was suddenly cut in half or if their expenses doubled overnight, it can - and does - happen.
You should know which of your accounts are in your name alone, and which, if any, you hold jointly with your partner. You should also look at your pension plans - and your spouse's pension as well, if you're married - and your retirement investments. When will you have access to those funds? What amount can you expect them to provide?
It's a good idea to know what your health and insurance plans cover in case of an emergency, and whether you need authorization to get emergency treatment. Also be sure you know where copies of life insurance policies are and whom you must call to file a claim.
Finally, you and your partner should both know where all your legal documents are, and how to access them. That can include your keys or codes for a lock-box or safe, your household computer passwords, and locations of all your bank, retirement, and investment accounts
Life's bumpy road
Once you have a grasp on your current situation, you'll be ready if you hit a bump in the road. No matter what you might face, having money set aside during these rocky times will be essential.
For instance, what if the furnace in your home has to be replaced, or the roof of your house springs a major leak? Or what if you're facing a more long-term challenge such as providing for a disabled child?
One thing you can and should do is build your own emergency fund. Financial advisers encourage people to set aside a minimum of three to six months' worth of income in a readily accessible account, which you can tap into when you have unforeseen expenses. These expenses may be large, such as funding your elderly relative's healthcare or putting some extra cash into your small business. Or some might be smaller, like replacing your car's transmission or buying a new refrigerator.
You and your financial adviser can decide where it's best to park that money, whether it's in a relatively risk-free money market fund, or a savings account at your bank.
Some experts argue that its better not to keep too much of your emergency money in low-risk bank accounts. They suggest you may want to keep a portion of your funds in a variety of short-term investments, which you can sell if you are ever in need of emergency cash. Otherwise you may risk losing too much buying power to inflation.
Track your spending
Most people think they know where their money goes, but are shocked to discover the truth. Experts say that most people, from all walks of life, spend about 20 percent more than they think they do.
A sure way to find out where your money is going is to track your spending over a period of time. To begin, carry a small notebook and record your daily spending (all of your expenditures, however small).
Use this information to:
- Identify areas where spending can be cut
- Redirect your income toward the things that matter most
- Create a monthly game plan (budget) for your spending
You may find it easier to track spending if you:
- Save your receipts and write on them what was purchased
- Record all cheques and ATM withdrawals in your check register
Track your spending for a month or two, and then ask yourself:
- Where did most of your money go?
- Were there areas where you were surprised by how much you spent?
- Are there areas where you could cut back?
In addition to tracking your spending, determine how much money you are bringing in each month. If you find that your spending is exceeding your monthly take-home income, the next step is to try to cut back on spending.
Five ways to track your spending
Even the most careful spenders can find themselves with too much debt on occasion. The best way to deal with credit problems is to develop good habits in order not to over-spend.
Listed below are five ways you can control your spending habits.
Stop impulse buying
Impulse buying is one of the easiest ways to throw away money on things you don't really need. Here are some ways to regain control.
Make a list
Make a list before you go shopping, then try to stick to it. Ads, store displays and coupons will try to entice you to buy things that aren't on your list. Use your list to help you resist.
Shop when you need to
Shop when you need something, NOT for fun or to cheer yourself up. That's when you're most prone to impulse buying and bad shopping judgment.
You're the boss
Before making any sizeable purchase, leave the store to think it over. If the sales person has been using pressure tactics, don't go back. Pressure tactics include statements like: "It's the last one in stock." "If you buy one right now, I'll give you an additional discount." "This is a once-in-a-lifetime deal."
Is there an alternative?
Is there a less expensive alternative? Frequently, you can save by buying a less-expensive model. You can also buy just about any quality item second-hand. Check the classifieds in your local newspaper, or use the Internet.