Tuesday, February 10, 2009

Credit Card Debts: Causes & Preventions


Credit Card is a bank-issued card that allows consumers to purchase goods or services from a merchant on credit. It is made of plastic card, with a magnetic strip or an embedded microchip, connected to a credit account to make purchases. Credit card debt is an example of unsecured consumer debt, accessed through ISO 7810 plastic credit cards. The credit card debts will accumulate and increases through interest and penalties when we do not pay the company for the money we spent on. How to tell if you are in too deep of credit card debt?
Below are some signs to be determined:
1. You find that you can't make your minimum payments on your credit cards.
2. You realize you've been borrowing money from family members or friends to cover your payments.
3. You've gone to a lender you wouldn't normally use -- like a payday lender that loans you money at really high rates against your next paycheck.
4. When 15% of more of your monthly income goes to pay the credit card bills

These are the warning signs which imply that the usage of credit card is out of control.



Causes for credit card debts:

1. Poor money management: One without a proper financial plan in life will tend to spend their money unwisely and spend money on unnecessary matters. This kind of people will buy whatever they like without thinking whether they afford them or not. All in their mind is credit card can buy anything and they do not have to pay now.
2. Gambling: This is a typical cause that leads to massive amount of credit card debts. One who are addictive to gambling will not care about where they get the money and the consequences if losing money, thus lead to a financial disaster when borrow money through credit card method.
3. 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.
4. Financial illiteracy: This refers to those people who take money for granted without consider how money comes from and how credit card really functions. This group of people usually is youngster with parent’s financial support and they spend money in improper way.



Prevention:

1. Develop a budget: Budget is needed to guide us on spending money wisely and only when needed. Develop a budget with listing the income you get monthly and states all the necessary expenses in a month (eg. Water bills, electric bills, rental, food, car loan and car fuel). This is a helpful way to track your spending patterns and identify necessary expenses.
2. Keep your credit limit low: High credit limit will make us purchase more and lead to more debts to be paid. When the bank inform you that your credit limit has been increased, try to contact them and reject the offer. The lower credit limit the lower risk we get into high debts.
3. Self control and self-disciplined: It is often said that the gun don’t kill people! It is the people who kill people. The point is that we are the one who cause high credit card debts and all we need to do is control our spending on credit card. Only use credit card when urgent. If we feel that we cannot control our will to purchase using credit cards, cut up the cards.

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