Solving Credit Card Trouble
Debt and credit card trouble can sneak up on you gradually or can suddenly appear, seemingly out of nowhere. You'll know trouble is coming when you can no longer pay off your debts at the end of the month with the money from your paycheck. If you have to dip into your savings to pay off your debts, sit up and take notice, because your spending habits just might be spiraling out of control.
If you overspend and exceed your credit limit, the credit card company will put a stop to your account. The general rule is that when you have exceeded your limit by 10 percent, your card will be frozen from further use until you make a payment to get the balance down below your limit, and you'll be charged a whopping fee as well. You could request an increase in your limit, but that's jumping from the frying pan into the fire, isn't it? Besides, most credit card companies are reluctant to increase your limit after you have exceeded it. If you need to increase your limit, do it before you max out your cards.
Recognizing Credit Trouble
Some people get so far into debt trouble that it's extremely difficult to fix. If you think you're having trouble managing your debt, it's very important to acknowledge the problem early and take immediate steps to fix it. Today, an increasingly common problem is identity theft, where thieves obtain your personal information and use it to establish credit card accounts in your name. This, as you can imagine, has the potential to cause huge credit problems, even though you weren't responsible for the spending. It's important to recognize the potential for identity theft and to take whatever steps possible to prevent it.
Preventing and Recognizing Identity Theft
Identity theft occurs when thieves compile enough information about you to acquire credit cards or purchase items online in your name. As far as the credit card company or online retailer is concerned, you are responsible for the purchases, even though you never ordered or received goods. Identity thieves usually set up new credit card accounts, changing the responsible address from your home to a post office box.
In 2003, the Federal Trade Commission (FTC) released a survey that provided the following information:
- 27.3 million Americans have been victims of identity theft during the past five years.
- The total cost to American financial institutions was $33 billion, and the direct cost to consumers was $5 billion.
- Identity theft is the fastest growing crime in the United States.
- In 2003, identity theft accounted for 42 percent of all complaints filed by consumers before the FTC.
- In 25 percent of all cases, the identity thief was someone the victim knew.
Unfortunately, you can be a victim of identity theft and not know it. You could attempt to make a credit card purchase, only to be turned down because your credit report shows you recently purchased a second home at the shore, a luxury car, and a diamond necklace for your wife. All without you having a clue. One way thieves obtain the personal information necessary to pull off identity theft is to scour residential and business trash. Documents such as cancelled checks, tax information, and bank statements can provide thieves with many of the numbers they need to establish accounts or make purchases in your name. These numbers include phone numbers, driver's license number, credit card numbers, personal identification, bank account numbers, social security numbers, and so on and so forth.
Make certain that when you use your computer to access private information, you're on a secured site. Be sure the lock icon is visible on the website, and that the site uses a 128-bit SSL to keep your data secure.
To minimize your chances of identity theft, shred all papers before disposing of them. Check all bank and credit card statements carefully, and immediately report any suspicious withdrawals or purchases. Close out any credit cards that you don't use, and don't ever give anyone information if you're not absolutely sure who they are and why they need the information. Never give personal information to someone who calls on the phone, and always be sure you take and secure credit card slips after making a purchase. Don't leave your mail in the mailbox over night, do not provide personal information in an e-mail, and keep track of all bills, receipts, and statements. And, check with your credit card provider to make sure it monitors and checks suspicious activity on your account.
Knowing When to Get Help
Even though identity theft is a growing problem, it still accounts for very few of all cases of credit trouble in America. We've discussed extensively how our society encourages us to spend. We're big-time consumers, doing just what advertisers and marketers want us to do.
A rule of thumb is that your total debt service at the end of the month should not be more than 36 percent of your monthly gross income. Total debt service (the amount you are required to pay monthly to keep your debts/loans current) includes payments for rent or mortgage, car payments, college loans, and charge card (the kind you must pay off every month) payments. If your debt service is more than 36 percent of your income, you'd better take a closer look at what you're spending money on.
People buy things and spend a lot of money for many different reasons. Some are compulsive spenders, buying more and more because it fulfills some need within them. Studies show that many women try to gain affection by financially supporting men. They are trying, in effect, to buy love. People who were abandoned or ignored as children sometimes try to fill that emotional void with things, and will buy whatever they can.
Overspending has serious consequences and can be a true addiction, just like drinking or gambling. If you think you can't stop spending, and you're incurring more debt than you can handle, get some help. You can contact Debtors Anonymous at the General Services Office, PO Box 920888, Needham, MA 02492-0009. The phone number is 781-453-2743. Or access it on the Internet at www.debtorsanonymous.org. There are also counselors who specialize in financial recovery. Some of them work for nonprofit organizations, and their services can be obtained at no cost. Check your phone book for local listings.
Repairing the Damage
If you determine that you have a problem with your credit and debt, there are steps you can take on your own to fix it. The most immediate step is to stop incurring more debt. To do that, you might have to get rid of your credit cards completely. “What?!” you shriek. “Live without credit cards? Impossible!”
Dollars and Cents
Try putting your credit card in a deep freeze to avoid using it when you shouldn't. Put it in a container of water in the freezer, and thaw it out when you want to use it. Waiting around while it thaws allows you time to consider the purchase and whether it's a good idea. If you do this, remember that it's against the rules to use the microwave to thaw it out!
Guess what? It's not impossible. It won't be easy, but if you can't resist racking up debt on your credit cards, then you're better off without them. If you can trust yourself, then keep one to use when you want to rent a car or reserve a hotel room. Otherwise, cut them up and call the credit card companies to cancel your accounts. Then, plan carefully to pay for whatever you buy with cash, check, or a debit card.
When you stop piling up more and more debt, you can start working to get rid of what you already have:
- Take a close look at what you owe and to whom you owe it. Record all the information and pay special attention to any bills marked past due. If you're in the middle of a credit card billing cycle, call the provider and ask for your balance. You need to know exactly where you stand.
- Contact those creditors to whom your payment is overdue. Let them know that you acknowledge your debt, and you will work in good faith
- to pay it off. Ask if you can work together to come up with a plan that will enable you to pay off the debt in a manner that you can afford.
- Think about possible sources of money. As difficult as it might be to go to a family member or friend, confess your sins and ask for a loan; it may be the healthiest thing for you to do, financially.
- If you have any money in a savings account, break into it and pay off what you can. It's practically a sure bet that you're paying more interest on your debts than you're earning on your savings account.
- If your debt is serious, consider borrowing from your retirement account at work. Ask the benefits department at your company if you're permitted to borrow from your account balance. If you are, find out what the interest rate is. It's usually reasonable, and as you pay off the loan, the interest goes back into your account.
- Sell assets. Sell any stocks you may have, or sell a collection. Downsize your car from the one of your dreams to a Hyundai. Do whatever is necessary to get caught up.
- Consider getting a second job.
Be honest with yourself when assessing your debt. If you're afraid you might have a problem, you probably do. But unless you've had the problem for a long time and have ignored it, you probably can figure out a way to fix it before it gets completely out of hand.
More on: Family Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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