Credit Card Debt: Causes and Prevention
Credit card is defined as card that may be used repeatedly to purchase product and services on credit which issued by banks and financial institutions. Credit cards provide us with the added security and ease when shopping and traveling but we tend to misuse them and may lead to credit card debt. When properly used, is an extremely convenient tool. Unfortunately, a lot of people use credit cards as a "crutch." If they can't afford something they really want, they charge it. When it comes the time to pay the bill they pay the minimum amount due. This is where credit card debt arises where debt accumulates and increases via interest and penalties.
Credit card debts are major cause of bankruptcies each year. It is because many people have never realized of its consequences from financial and non financial perspectives when get a new credit card or not enough safety net when there is an incident happen.
The results of not paying this debt on time are that the company will charge a late payment penalty and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default". The late payment penalty itself increases the amount of debt the consumer has.
There are causes of debt will be discussed in the below:
1. Poor money management – Nowadays, people are unaware to conduct a monthly spending plan and do not keep track of monthly bills. People have never realized their spending on the items that are useless and do not have any value in their life. Thus, it has lead to a rise in debts by using credit cards.
2. Banking on a windfall - Very often, spending tomorrow's money today is very tempting. It is advisable that don’t spend until you hold an amount of money in hand.
3. Financial illiteracy - Many people don't understand how money works and grows, how to save and invest for a rainy day, or even why they should balance their checkbook.
4. Excessive medical expenses -Credit card will probably become one of the sources of funds to pay off the medical expenses if health insurance is not adequate to cover the medical bills if one of your family members suffers serious illness. In United States, almost everyone pays their medical expenses by credit cards to get treatment.
5. Gambling - Gambling has become part of entertainments in our life. It is hard to stop when it becomes addictive. Thus, it will surely lead to a financial disaster if borrowing money through credit card for gambling.
Preventions:
1) Making and budget
People have to create clear budget and stick on it that includes monthly bills, food, clothes, entertainment and miscellaneous expenses will prevent from overspending and fall under deeper debt load. Besides, credit card users should pay off your debts to get rid of the highest interest payment first. List all of your credit card debts, and the amount you are paying each month. Pay off the lowest amount first. Then use that money to start paying off the second lowest amount.
2) Self control and discipline
One of the best practices is to have a direct set up so that able to pay back the full amount each month and use in emergencies. Thus, self control and discipline to keep these cards in wallet and would not overspend. Avoiding the expensive purchases and not buying things that you don't really need on credit is an important step to getting on the right track. Lastly, keep our credit cards spending to amounts that we know we can pay off, don't go over-board with unnecessary purchases, and budget how we plan on paying back our charges.
3) Choosing card wisely
People are advised to cut up your cards so that you are not tempted to use them. Pick and sign up for companies that are willing to offer us a low percentage rate and cut up the rest The one you keep should be deemed an ‘emergency card.”
References:
http://en.wikipedia.org/wiki/Credit_card
http://www.mozdex.com/prevent-credit-card-debt/
http://ezinearticles.com/?Understanding-Credit-Card-Debt-Problems&id=1225936
http://ezinearticles.com/?Credit-Card-Debt---Prevention-Is-Better-Than-Cure&id=226244
http://www.fastweb.com/fastweb/resources/articles/index/102925
http://www.bankrate.com/brm/news/debt/debt_manage_2004/top-10-causes.asp
by Foo Seow Min
Posted on 8:37 AM by 4EvEr and filed under
week 5
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Credit card debts are major cause of bankruptcies each year. It is because many people have never realized of its consequences from financial and non financial perspectives when get a new credit card or not enough safety net when there is an incident happen.
The results of not paying this debt on time are that the company will charge a late payment penalty and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default". The late payment penalty itself increases the amount of debt the consumer has.
There are causes of debt will be discussed in the below:
1. Poor money management – Nowadays, people are unaware to conduct a monthly spending plan and do not keep track of monthly bills. People have never realized their spending on the items that are useless and do not have any value in their life. Thus, it has lead to a rise in debts by using credit cards.
2. Banking on a windfall - Very often, spending tomorrow's money today is very tempting. It is advisable that don’t spend until you hold an amount of money in hand.
3. Financial illiteracy - Many people don't understand how money works and grows, how to save and invest for a rainy day, or even why they should balance their checkbook.
4. Excessive medical expenses -Credit card will probably become one of the sources of funds to pay off the medical expenses if health insurance is not adequate to cover the medical bills if one of your family members suffers serious illness. In United States, almost everyone pays their medical expenses by credit cards to get treatment.
5. Gambling - Gambling has become part of entertainments in our life. It is hard to stop when it becomes addictive. Thus, it will surely lead to a financial disaster if borrowing money through credit card for gambling.
Preventions:
1) Making and budget
People have to create clear budget and stick on it that includes monthly bills, food, clothes, entertainment and miscellaneous expenses will prevent from overspending and fall under deeper debt load. Besides, credit card users should pay off your debts to get rid of the highest interest payment first. List all of your credit card debts, and the amount you are paying each month. Pay off the lowest amount first. Then use that money to start paying off the second lowest amount.
2) Self control and discipline
One of the best practices is to have a direct set up so that able to pay back the full amount each month and use in emergencies. Thus, self control and discipline to keep these cards in wallet and would not overspend. Avoiding the expensive purchases and not buying things that you don't really need on credit is an important step to getting on the right track. Lastly, keep our credit cards spending to amounts that we know we can pay off, don't go over-board with unnecessary purchases, and budget how we plan on paying back our charges.
3) Choosing card wisely
People are advised to cut up your cards so that you are not tempted to use them. Pick and sign up for companies that are willing to offer us a low percentage rate and cut up the rest The one you keep should be deemed an ‘emergency card.”
References:
http://en.wikipedia.org/wiki/Credit_card
http://www.mozdex.com/prevent-credit-card-debt/
http://ezinearticles.com/?Understanding-Credit-Card-Debt-Problems&id=1225936
http://ezinearticles.com/?Credit-Card-Debt---Prevention-Is-Better-Than-Cure&id=226244
http://www.fastweb.com/fastweb/resources/articles/index/102925
http://www.bankrate.com/brm/news/debt/debt_manage_2004/top-10-causes.asp
by Foo Seow Min
