Dangers of Excessive Credit Card Debt
Credit card debt may not be a sin on its own, but when it is getting beyond a reasonable level, you may be heading for a financial crisis. I just checked US Debt Clock recently, I realized that the US credit card debts figure is now above $1 trillion. This is alarming! If I may ask, how much of this amount are you owing? If you ask the people with too much credit card debt how they got into it, some of them may likely tell you that they don’t know. Does it mean that they were spending without knowing?
Well, one thing about credit card is that, it makes spending convenient. You don’t need to carry cash about. To make things worse, you don’t even need to have your own cash before you can buy things. With your credit card, you can buy things on credit up to your credit limit. Just swerve your card, the transaction is completed. You don’t even feel it that you are spending. Unlike when you carry cash, for each cash you pay, the money in your purse is reducing. This can make you feel constrained in buying some items. This is not the case with credit cards.
Read Also: How to Build Credit Score Without Going into Debt
Before we discuss the dangers inherent in carrying excessive credit card debt, let’s quickly scan through some issues which may be a red flag that you are going into credit card debt.
Signs of Going into Debt
You pay only the minimum payment month after month: Credit card companies do not make it mandatory that you must pay off your card balance at the end of the month. They require that you make minimum payment which can cover your interest amount and a small portion of the principal. So, if you only make minimum payment at the end of the month, you will just be scratching the surface of the debt.
You take cash advances to pay daily living expenses: It is true that you can use your credit card to withdraw cash from the ATM but that is not a good way of using the card. Each time you withdraw cash with your credit card, such withdrawal is treated as cash advance. You will be charged cash advance fee. Also, interest will be charged on the amount withdrawn. The interest start accruing immediately. Imagine you take cash advances and you don’t pay immediately or at the end of the month. The interest will start piling up until it becomes a huge amount.
Your monthly minimum credit card payments exceed 15% of your take-home pay: If you are paying as much as 15% of your take-home pay just to service credit card debt, you may not have much left for your monthly expenses. This is not a healthy financial situation at all.
You pay important payments such as rent or mortgage late: There are some expenses that are very important while some are discretional. If you are always late in making important payments such as your monthly rent or mortgage, you don’t need any financial expert to tell you that you are facing financial crisis.
You borrow from one credit card to pay another: Although credit card companies frown at the practice of paying one credit card debt with another credit card; some people may choose to withdraw cash from one credit card and then deposit it into their account to pay another card. This practice will definitely plunge you further into debt. Remember what I explain on how credit card companies treat cash advance and its effects on your finance.
You apply for other cards because you have reached the limit on your existing cards: You understand that you can’t exceed your credit limit on a particular card. If you always max out your card, it may be a sign that you are under pressure financially.
You find yourself always out of cash: We need cash for certain transactions. If you are always out of cash and you have to depend on your credit card for every purchase you make, there is no way you will not end up in debt.
One thing about credit card debt is that, it is easy to get into but it is not that easy to get out of it. Although credit card debt is fast becoming the lifestyle of many nowadays, it comes with its attendant problems. These are discussed below:
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Dangers of too much credit card debts
High Interest Payment: Interest rates on credit cards are very high. High interest rate may not be a problem if you pay your card balance at the end of the month. Credit card companies don’t charge interest on normal purchases if you pay off your balance at the end of the month. But if you are unable to pay the entire card balance, then, you will be charged interest on the balance. If you have like $6,000 in credit card debt at 18% interest. You will end up paying over $3,000 in interest charges if it takes you five years to pay it off. This is a huge amount. Imagine what you can do with $3,000. Please note that you may be charged fee for foreign transactions even though you pay off the balance at the end of the month. However, there are certain travel reward cards that don’t charge foreign transactions fee.
Further Debt: One major danger about credit card debt is that, it can drag you into debt which you may not be able to get out from easily. The debt is not just about the principal alone, it includes the interest which must have accumulated over time. The interest rate is usually compounding. A situation whereby the interest will not only accrue on the principal only. The interest is accruing interest again. This will continue except you are able to quickly pay off the debt.
Lower Credit Score: When you carry too much credit card debt, there is possibility that you may miss your payment. Each time you miss your payment for a period more than thirty days, your credit card company reports this to the credit bureaus. If this is done, the late payment will appear in your credit report. This will ding your credit score and it may even make it difficult to get new credit or loans. Besides, another criteria that is used in calculating your credit score is credit utilization. If you carry too much credit card debt, you may have exceeded thirty per cent credit utilization ratio. If you want to have a good credit score, you will need to keep your credit utilization below thirty per cent among others. Anything above that level may hurt your credit score.
Emotional and psychological effects: Nobody likes debts. When you don’t have enough money with you to buy what you need, you don’t feel good about it. It get worse when you are into debt. Lack of money is usually given as one of the top reasons for tensions in marriage. Credit card debt can affect your family relationship negatively.
Inability to save: Financial expert will tell you that you need to pay off your high interest debts before you start saving or investing. Truly, it doesn’t make sense keeping money in a savings account that may not pay you up to 5% interest while you are paying interest of about 20% on credit card debts. Until you are able to discharge all your high interest debts, there may not be any incentive to save.
Wage Garnishment: If you are unable to pay off the debt, the credit card provider may sue you. The court may declare that your wage be garnished. This judgment may not favour you at all.
Read Also: Debt Management: Do-it-yourself approach
Fine print: When signing up for a new credit card, some of us usually fail to read the terms and conditions carefully. If anything should go wrong and the credit card company takes it up, it is then we suddenly realise that we have agreed to certain terms which we wouldn’t have done if only we took our time reading the fine print. At this time, it may be too late. Only thing we are left to do is just to abide by the terms and conditions as applied to the card.