Do you experience waves of nausea each time you open a credit card statement? Or maybe you don’t open statements until you’re ready to pay the bill – it’s your way of hiding from your debt.
Regardless of your method for dealing with credit card debt, there’s one important thing to remember: high balances aren’t going to mysteriously disappear. Being a slave to your credit card company impacts your financial health in more ways than one. Too much debt lowers your credit score and raises your debt to income ratio, thus making it increasingly difficult to obtain loans. And the longer you pay on your credit cards, the more you pay in interest. But this doesn’t have to be your life.
Several strategies can help you get out of debt – but first – you have to understand the reasons you’re in debt.
1. Living in denial about your income
Maybe your friends are financially comfortable and can shop and vacation whenever they please. Or maybe you grew up in a house where money was no object. In either case, sticking with a budget and living within your means can present a real challenge. Constant pressure to live the same lifestyle as your peers may cloud your judgment and prompt a few unwise choices. If you can’t pay with cash, you might buy everything on credit.
2. Obsessed with impressing others
Be honest. How do you feel when someone comments on your clothes, electronics, car and other personal items? Some people have a constant need for attention and approval, and they want to “wow” others with their latest buys. There is nothing wrong with nice things, and if you have the bankroll, go for it. But if your fabulous appearance and high-end merchandise are all compliments of a generous credit limit, your need to impress can drive you deep into debt.
Sure, your latest purchase might gain the attention of a few and command a few praises, but people ultimately go on with their lives. Why get overwhelmed with debt simply to uphold an image?
3. You never pay more than your minimum
Can’t pinpoint why your credit card balances never decrease? There’s a simple explanation. Credit card companies only require a monthly payment that’s around 2% or 3% of your balance. Therefore, if you owe $1,000 on a credit card, your minimum payment will be around $20 a month. Yet, when you make your payment and open your next statement, you might notice very little change in your balance. As a matter of fact, the new balance may barely reflect your previous payment.
This is a common annoyance that occurs when you only pay the minimum. If you have a high credit card interest rate, the amount you’re charged in interest can eat away at your previous monthly payment, thus keeping your balance about the same from month-to-month. But if you adjust your spending and free up extra cash, you can drop a lump sum on your debt each month and pay off the balance sooner.
4. Not enough income
Maybe you don’t live an extravagant lifestyle or try to keep up with friends, yet you find yourself deep in debt. Perhaps the problem isn’t your lifestyle, but your income. The cost of living is high in certain areas. And when your housing expense accounts for a large percentage of your income, you might compensate and pay for other expenses with credit cards. Moving is an option. But what if there aren’t many affordable living options in your city? Maybe you can move into a smaller home and sacrifice space for affordability, or move outside the city and commute to work. Another option: find a roommate to share the expenses. This frees up cash each month and gives you the chance to pay down debt.
5. Expensive medical costs
You can’t always choose your health plan, especially with a group plan. And if your employer selects a not-so-good health plan, this choice may raise your yearly out-of-pocket cost. Need better options? Check individual health insurance plans and apply for coverage on your own. Health insurance plans with high deductibles or coinsurances can cost a pretty penny, especially if you visit the emergency room or need surgery. Some families cannot meet this high expense and credit cards become their payment method of choice.
6. No spending plan
No type of budget or spending plan raises the risk of depleting funds before the end of the month. According to a financial poll taken by Bankrate.com, approximately 40% of participants said that they did not track their spending or have a budget. Not sure whether this reflects the attitude of most Americans. But if it does, it might provide an explanation for increases in consumer debt.
Budgets are tedious and restrictive, but they make good financial sense. In all honesty, most people aren’t in a position to spend at will. A budget is a simple and practical way to keep your finances on track from week-to-week, thus ensuring that there’s enough income to cover your expenses from paycheck-to-paycheck.
