How to Control Your Personal Debt

All Americans are loaded with credit card debts.

 

An average American household with one credit card has nearly $15,950 in credit card debt (in 2012), that’s according to CreditCards.com and the average interest rate runs in the mid- to high teens at any given time.

 

Some debts are good. If you’re borrowing for a home or for college, that usually makes good sense. Just don’t borrow more than you can afford  to pay and make sure to look for the best offers.

 

Other debts are just that, bad. Never use your credit card to purchase things that you consume quickly, such as meals and vacations and if you can’t afford to pay off your monthly bill in a month or two. That’s the fastest way to fall into debt. Instead, stash away some cash each month for these items so you can pay for them in full. If there’s something you want but it’s really very expensive, save for it in a period of weeks or months before charging it to your card so you can pay the balance when its due and thus avoiding interest charges.

 

Get a grip on your spending. A lot of people spend loads of money without giving much thought to what they are buying. Write everything down, all the expenses, and cut down or totally eliminate unnecessary things and start saving money to use to reduce debt faster.

 

Pay off highest interest –rate debts first.

 

 

Image from Practical Money Mastery

Image from Practical Money Mastery

Don’t fall for the minimum trap. If you do this, you’ll barely payoff the interest you owe, and nothing of the principal amount is reduced.

 

Watch where you borrow. It may be convenient to borrow against your home but it can be very dangerous. You could lose your home or fall short of your investing goals at retirement.

 

Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don’t have an emergency fund, a broken furnace or damaged car can seriously upset your finances.

 

Don’t be so quick to pay down your mortgage.

 

Get help as soon as you need it.

 

Europe Prepares for An Increase in Credit Card Defaults

There has been a considerable amount of increase in consumer debt defaults as the credit card crisis caused billions of dollars in losses among US banks that spans across the Atlantic.

The International Monetary Fund projects that of US consumer debt totalling $1,914bn, about 14 percent of that will be defaults in payments.

Much of that falling will come from UK, the continent’s biggest nation of credit card borrowers. According to a data released by the National Debtline of the UK, there has been a considerable increase in the number of calls it has received from UK consumers, all faced with the dilemma of loans, credit cards and mortgage arrears. It has doubled from the twenty thousand calls it had recorded from May, 2008. Calls received since May of this year hit 41,000. It further added that the number of calls showed no signs receding.

Create and follow a budget Image taken from: Funds for NGOs

Create and follow a budget
Image taken from: Funds for NGOs

In the UK, the latest credit card indices from Moody’s, the rating agency, the yearly charge-off rates had increased tremendously from 6.4 per cent of loans in May 2008 to 9.37 per cent in May 2009.

Analysts further added that they expect more defaults as unemployment in the UK rises and personal insolvencies, which reached 29,774 in the first quarter of the year, and continues to increase.

Add to these is the falling UK housing market, and stricter lending requirements by banks which means that consumers suffering from defaults in their payments cannot withdraw equity from their homes to pay off debts such as credit cards or unsecured loans.

UK banks have also reported an increase in credit card debts.

Credit card delinquencies had increased in the first quarter of the year, which reflects a negative image in economic conditions and the rising unemployment.

The result of which is a reduction in credits and tightening approval rates for new credit cards which was, as of March this year, running less than fifty per cent.

The graveness of the problem in the financial crisis alongside the rising unemployment on both sides of the Atlantic have created a scenario of fear of a substantially higher default rate in the coming months.

Using Credit Cards Effectively

It goes without saying that credit cards are useful for monetary transactions in this cashless society. Credit cards meet the needs of different people in different ways. It is thus important to choose the right card and use it effectively so as not to fall into a debt trap.

 

A card that offers interest free charges for longer, or one that has lower interest on purchases will suit a consumer who needs extra time in paying for his or her purchases every month. If you know that you can’t pay your balance on time, look for a card that offers a longer interest free duration.  Some banks offer no interest for up to 6 months or more, so this may be a good offer to take advantage of as long as you don’t overlook the date the interest rate charges commence.

Credit cards can serve as instant cash.  Image taken from: Gadoxo Graphy

Credit cards can serve as instant cash. 
Image taken from: Gadoxo Graphy

If you are planning to use your credit card for basic needs such as making rare online transactions and as an emergency backup paying for an annual fee will not be worthwhile. However, if you are a frequent user of the credit card and are after the rewards programs or redeeming your points for purchases, then the annual fee may be worth paying for.

 

It won’t always be a good idea to increase the credit limit of your card if this is offered by your bank.  By sticking to the minimum credit limit, you can be assured of not being lured by the temptation to overspend. Also, trying not to get too close to your credit limit is a good way of restraining yourself from unnecessary spending. Spend within your budget and only spend on what is necessary.

 

Some people tend to switch from card to card with the aim of saving money with balance transfer rates. Though this may sound practical, if you fail to pay the required amount on time, or to switch card again before the interest rate goes up, it may end up damaging your credit.

 

Keep your receipts in a safe place so you can keep track of your monthly expenses.

 

Credit cards can be an advantage if you can use them effectively.

The Euro Crisis

The Eurozone crisis is an on going crisis that has been affecting the countries of the Eurozone since 2009. This crisis happened when a group of ten central and eastern European banks asked for a bailout. What is a bailout and what prompted these banks to ask for a bailout?

 

A bailout is an act of giving financial assistance to a failing business or economy to save it from collapse. At that time in 2009, the European Commission released a forecast of a 1.8 per cent decline in EU economic output . What were the reasons for giving such a forecast? First, weak and actual potential growth. Secondly, the competitive weakness. Third, liquidation of banks and sovereigns. Fourth, large debt-to-GDP ratios, and lastly, considerable liability stocks (government, private and non-private sector).

Clear off your debts. Image taken from: The Monroe Institute

Clear off your debts.
Image taken from: The Monroe Institute

There has been a considerable increase in the number of people in the UK who are seeking financial assistance from many help groups. Why are they seeking help? Financial analysts say some consumers run into problems of making their payments and are thus forced to declare bankruptcy. This may cause serious implications in the future for this borrower when he tries to apply for anything be it a car loan to a job with a large corporation. A lot of big corporations nowadays require pulling up credit records as part of the job screening process.

 

For others, however, becoming insolvent is their only choice. In a recent report put out by The Bank of England, it showed that there are different forms of insolvency and the remedy for each individual is slightly different from the other. They are as follows:

 

-Bankruptcy

-Individual Voluntary Arrangement (IVA)

-Debt Relief Orders

 

For the particular case of each individual person, one option may be better than the other.

 

The most commonly form of financial insolvency is bankruptcy, and many individuals use this status. The benefit if using this status is that the person concerned is wiped clean, but in the process one loses every asset of value.

 

Next is the Individual Voluntary Arrangement wherein the person and his/her creditors seek the help of a professional to arbitrate and make a promise to pay.

 

Last form of financial insolvency is the debt of relief orders which is a newly introduced method for certain people to pursue.

The Basics of Credit Card Debt Consolidation

For credit card debt consolidation to be effective, the consolidation loan should have a lower interest rate and lower repayment time than you would have had with otherwise. Average out the interest rates on your credit cards and compare that to the interest rate on your consolidation loan.

 

Ideally, you’d want your monthly debt payments to decrease after consolidating. However, some debt consolidation loans lower your monthly payment by increasing the total repayment period. If you spread your payments out for a longer period of time, you could end up paying way more interest in the long run.

To qualify for many credit card debt consolidation loans, you need to have agood credit score. Unfortunately, if you’re having trouble making your credit card payments, you might not have the good credit you need to qualify for the best interest rate on a debt consolidation loan.

Credit history will be checked once you apply for a credit card.  Image taken from: Wall St. Cheat Sheet

Credit history will be checked once you apply for a credit card.
Image taken from: Wall St. Cheat Sheet

 

Even with an excellent credit score, you might find that you can’t get a loan large enough for credit card debt consolidation, especially if your debt load is over $20,000. Instead, lenders will ask if you have an asset, like a car or house, that you can use as collateral for the loan.

Borrowing from your home equity is another option for credit card debt consolidation. This can work if you have enough equity in your home to pay off your credit card debt. Otherwise, paying off some debts and not others won’t eliminate your problem.

 

There’s no doubt about it, dealing with debt can be a struggle. When your debt load is overwhelming large, the only thing you can think about is a solution. If you’re like most people you want to ease the debt burden, but don’t want to ruin your credit with bankruptcy.

 

Many people in debt have overextended themselves, lived without money for emergencies, and used debt to fund a lifestyle they couldn’t afford. Debt consolidation just masks the effects of these problems. It doesn’t actually solve them. You must fix the habits that led you to debt in the first place. Otherwise, you can easily find yourself back in the same situation.

Pros and Cons of Debt Consolidation

You could still clear off your debt, little by little. Image taken from: Make Money in Life

You could still clear off your debt, little by little.
Image taken from: Make Money in Life

 

When you consolidate your debt, you take out a loan to pay off several other debts. This allows you to consolidate the money you owe into one payment. A debt consolidation loan could be helpful if you ran up your credit cards while you were in business school, or if you have a number of high interest installment loans (student loans, car loan, etc.) This will allow you to roll this high interest debt into one manageable payment. If you have an easier time making your payments, you can avoid late fees, extra charges, and the bad credit that will inevitably result when you can’t afford to pay regular bills. For some people, debt consolidation may not be the answer. To start with, it can be difficult finding fair interest rates. If the rate on your new loan isn’t any better than the rate you pay on your current loans, consolidating your debt wouldn’t make much sense. It can also take longer to pay debts off. When you consolidate debt, you still end up owing the same amount of money. The main difference is usually the length of the term. This could leave you paying more in interest if the term is really long. If you are trying to decide whether or not debt consolidation can help you save money, you should contact a financial professional who can help you crunch the numbers. One of the largest dangers of debt consolidation is that you do not address the spending problems that caused you to go into debt in the first place. Often people will take out the consolidation loan, pay off their credit cards, and then start using the credit cards again. It can make it even more difficult to manage your debt and to make a difference in the way you are handling money. Imagine having your current credit card payments on top of another set of payments that are equal to it. You need to stop using your credit cards completely if you are considering this as an option to deal with your debt. Get on a written budget and pay off your debt as quickly as you can.

And the Bubble Sweeps Across Asia

Bad credit? No credit? 0% APR for the first six months – APR is the annual percentage rate of interest a credit card holder will be charged on all or a portion of the balance if the full amount is not paid on or before the due date. Free balance transfers. No money down. And, no credit check – all these to lure consumers.

But are these tell-tale signs that the mother of liquidity bubbles beckons us?

Give it some thought. Would anyone in his/her right frame of mind just all of a sudden offer to lend some money to a complete stranger to buy a new digital TV without doing any background check at all or requiring no down payment at all?

Not at all, you might say.

But if we won’t do such a foolish act, why would banks?

But most important of which, why would a certain bank not only make a loan such as that, but do it over and over again? And to top it all off, use OUR money to fund such loans?

This is becoming a worldwide phenomenon now.

Pre-approved credit cards are on the rise. And so are cash loans that you can choose the payment scheme that best suits you. And then, there are the real estate agents offering investment properties with no-down deals.

And people only make such offers if they: 1. Expect that everything will rise forever or, 2. They have so much money to lend that they are forced to make hasty decisions all in the name of gaining profit., both of which spells disaster.

We seem to have never learned our lesson. We say, this time, things will be different. But, it never is.

Everything now is so intertwined that a credit unwinding in even the smallest part could actually have such a big impact to the rest of the world.

These are the real assets – productive land, precious metals, private businesses – these are the safest, alternatives right now. Don’t go waiting for the day when someone is going to bump the table and the dominos start trickling down.

Image taken from: investopedia

Image taken from: investopedia

Boom or Doom?

A rapid increase in short-term loans is seen across Asia, as the rapidly increasing middle class dreams of a better lifestyle and banks are slowly veering away from the snail pace of the West.

Credit Boom Image taken from: online wsj

Credit Boom
Image taken from: online wsj

 

According to data, companies ranging from Citigroup Inc. to Japan’s big banks to Dutch finance providers that has built its businesses in Central and Eastern Europe has been issuing credit cards and doubling loans to finance purchases on cars, motorcycles, and home appliances from India to Indonesia.

Statistics show that that nonmortgage consumer credit in Asia outside of Japan rose to 67% in the past five years to $1.66 trillion by the end of 2012, that’s according to data provider Euromonitor International. There was only a 10% rise in the US for the same period as consumers cut back on debt following the financial crisis.

Target group of these lenders is Asia’s middle class, which is expected to balloon by an average of 100 million people each year. Be it credit cards or short-term instalment loans used to purchase motorcycles and home appliances, these lenders are out to lure these middle-class consumers. There are varied interest rates ranging from 15% for secured auto loans to as high as 40% for unsecured loans, appliances and electronics, partly because of the high demand for loans and little or no credit history at all for the borrowers. Loans can be paid in a span ranging from six months to five years.

It is believed that Asia is crucial for these lenders who are undergoing a surplus in deposits, low interest rates and weak economies in the West. It is projected that more than half of the world’s middle class is expected to reside in Asia, compared with one-fourth in 2009, estimated by Brookings Institution economist Homi Kharas.

It is common to have a rise in borrowing at this stage of development.

But some people are wary of this growth. The loans that are being pushed to the borrowers may leave them unable to pay. Another concern is that these debts might pose to be a bigger burden for low income people who have smaller financial protection when the going gets tough.

Credit Card Debt in the US

Credit card debt is an example of unsecured consumer debt, accessed through credit cards.

Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.

The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) 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.

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When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.

Research shows that people with credit card debt are more likely to forgo needed medical care than others, and the likelihood of forgone medical care increases with the magnitude of credit card debt.
Statistics
Quarterly Credit Card Debt in the United States Since 2010 (in billions):
• Q2 2012: $798.5
• Q1 2012: $790.3
• Q4 2011: $834.4
• Q3 2011: $799.5
• Q2 2011: $794.3
• Q1 2011: $786.0
• Q4 2010: $833.1
• Q3 2010: $819.2
• Q2 2010: $830.5
• Q1 2010: $843.1

Declines in credit card debt are often misinterpreted because they fail to include information about charge-offs. The possible causes for a decline in credit card debt are consumers paying down their debt, credit card companies writing charged-off debt off their books, or a combination of the two. Inclusion of charged-off debt can therefore significantly impact debt trends and the characterization of a nation’s financial health.
Consumers also commonly pay down a large portion of their credit card debt in the first fiscal quarter of the year as this tends to be the time when people receive holiday bonuses and tax refunds.

Credit card debt is said to be higher in industrialized countries.

Avoiding the Debt Trap  

Debt is like a disease that starts small and can quickly spread through one’s entire life. For many people that are living paycheck-to-paycheck and lack an adequate savings plan, just one bump in the road can cause a complete breakdown. Unfortunately, most consumers do not have adequate knowledge about managing their money, as financial planning is not a subject that is typically taught in schools.

Avoid the Debt Traps Image taken from: The Sydney Morning Herald

Avoid the Debt Traps
Image taken from: The Sydney Morning Herald

When it comes to credit decisions, it is important to understand that not all debt is bad, and there are situations where certain types of debt are necessary and helpful. An example of good debt is taking out a mortgage for the purchase of a family home, or buying equipment to help an entrepreneur grow their business. On the other hand, bad debt is generally used to finance one’s ongoing spending and lifestyle habits. This includes credit cards, personal loans or even payday loans, all of which usually carry high interest rates and associated costs.

Still, everyday victims emerge from poor money management and start on a journey to financial independence.

Spend less. Don’t buy something unless you can afford it. While that is easy to say, it can be a tough rule to live by. We are creatures of instant gratification and often want to have things now without fully considering the cost. Create a challenge for yourself to see how many areas of your spending you can cut back on, without compromising your needs and personal happiness.

Share budget goals with the family.

Buy on sale.

Ignore credit card offers.

 Pursue economical hobbies. 

 Avoid eating out. 

 Window shoppers beware.

Set up an exercise schedule.

Savings is critical. If you don’t already have one, make sure to set up an emergency fund right away. Allocate a set amount every month to continue building that fund over time. Most people get into debt simply because they have no savings to hold them over when rough patches come along. If you have a family, this may be the most important item on the list.

When it comes to extending credit to Americans, there are big winners and big losers on each end of the transaction.