One of the most common ways to wipe out that overwhelming credit card debt is to file for bankruptcy. Does that mean you have to file bankruptcy if you have tons of credit card debt? And if you are considering bankruptcy as an option for debt relief, is it going to be Chapter 7 or Chapter 13? How do you even begin to get out from under the late fees and high interest rates? Where do you start?
Bankruptcy should be a last-resort for those who need financial relief. Nonetheless, many Americans find themselves in a situation where it's bankruptcy or bust. I've talked to many of my clients whose creditors were calling upwards to 7 and 8 times a day because of late payments. I'd be willing to bet that most of you just stop answering the phone after a while. You can't make money grow on trees, so what's the point in trying to convince the creditors otherwise?
I just don't believe we max out our credit cards because we are necessarily addicted to spending (though I can think of a few times I've seen some pretty bad spending addictions). We might just rely on them too much. Having done research and pulling from my own long-term experience as a bankruptcy attorney, I can safely say that most of my clients have maxed their credit cards because of hardships (that's not to say that's the main reason they're using them, it's just a huge reason why they're maxing them out). More times than not, a member of the household loses a job, income, or becomes ill and decides to pick up the bills with the use of a credit card. So, inevitably, the balance sky-rockets, and (once you start making late payments) so do the interest rates. Sadly, at this point, it's your credit score that's nose-diving.
Did you know that credit card companies monitor each other's interest rates through your credit report?
...for example, let's say you have 2 credit cards. You are late on one card, but on time for the other. For the one that you're late on, your interest rate eventually goes up - the credit card company you pay on time will see this through your credit report, and will also raise your interest rates based on your payment patterns...so the roller coaster ride begins.
Or, you can prevent this trend by following these 4 steps:
1) ESTABLISH GOOD PAYMENT HISTORY WITH ONE CREDIT CARD COMPANY AT A TIME - Payment history is 40% of your credit score! Use only one credit card at a time. Make sure you can establish regularly-made, on-time payments before opening a new line of credit. Likewise, poor payment history will severely impact your score.
2) PAY OFF YOUR BALANCE EVERY MONTH - Amounts owed to your creditors comprises 35% of your credit score! If you have balances for more than one card, pay the one with the highest interest rates FIRST. Please remember, if you're not able to pay the balance before the due date, you really don't need to pay high interest rates for those rounds of drinks you bought the guys after the game that one time. Do you know how long that would take you? Just think about it.
3) STAY LOYAL TO YOUR LONGEST RUNNING LINE OF CREDIT - The amount of time you have stayed with a creditor can really help your score. Your relationship length makes up 10% of your credit score.
4) IF YOU HAVE TO GET A CREDIT CARD, GET A SECURED CREDIT CARD - And watch your score go up over time. Account types (like revolving lines of credit) and new activity both create 15% of your credit score, so while they're not huge factors in determining your debt health, they will eventually help you.
On a side note, I'd like to let you know that I see a lot of you maxing out your credit cards because of hardships. Before you rely on credit cards to save you, ask yourself these questions:
"Do I have any other options for borrowing money?"
"Do I have a family member who can help me until I can get on my feet?"
"Can I cut out any unnecessary bills like cable and internet?"
"Can I pick up an extra job, even if only 2-3 shifts a week?"
"Are there any assets that I can sell?"
"Am I willing to change my spending habits or start couponing?"
Credit cards can be a wonderful tool, but you have to know how to use them. Once you learn, you can reap the benefits of a good, solid credit score.
Check out this link for more stats on America's credit card spending and trends!
Next week: Automobile loans.....get ready!