Escape the Credit Card Trap

Here's a piece from Kiplinger's that discusses how people get into credit card trouble and suggests how to avoid it. But first, it sets the depressing scene of finances in the U.S.:

America is the richest country in the world, yet, ironically, we have the highest percentage of people living paycheck to paycheck. A recent study from ACNielsen revealed that about one in every four Americans say they don't have any spare cash. Without any wiggle room, it's easy to see why so many people turn to credit cards to finance life's little necessities.

Wow! 25% of people have no spare cash at all. This leaves them highly susceptible to unexpected price increases or expenses:

Take the recent spike in gas prices, for example. The American Banker's Association blames rising fuel costs for a record number of past-due credit card accounts. "Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations," says James Chessen, ABA's chief economist. If you drive your 20 MPG car 1,000 miles per month, you're spending roughly $50 more to fill up each month than you were a year ago.

Home heating costs will be another one that these people will face soon too. Problems like these can lead to people using their credit cards just to stay afloat:

Whether your budget is feeling the squeeze of higher gas prices, furnishing your new apartment, repaying your student loans or just staying on top of life's expenses, you might be tempted to lean on your credit cards to help get you through the month. But if you fall into the trap of relying on your credit card now, it could ultimately take you years -- and cost you thousands of dollars -- to wrestle yourself free.

Here's what Kiplinger's says you should do about it:

Take this opportunity to examine your spending. If you don't already have a budget, set one up. Use a worksheet or financial software such as Quicken or Microsoft Money.

Track your spending for a couple months so you can see where your money is going. Then identify areas you can tighten and free up more cash for those unexpected costs. If you've been using software, this is a snap. A low-tech method is simply jotting down your spending in a pocket-sized notebook. Record as much as possible, you'd be surprised how quickly those $2.95 lattes add up. As your circumstances change, you may have to make adjustments. For example, if you're spending more on gas, you may need to cut back on eating out or wait to buy that new sweater.

We're not saying you should cut up all your credit cards and flush them down the toilet. They can be a great tool in building a stellar credit report for when you're ready to buy a new car or take out a mortgage. But if you find yourself relying on them to make ends meet each month, it may be time to re-examine your credit habits.

It's a tough fact of financial life, but if your expenses go up, you must either increase your income or cut other expenses -- there are no other options (at least ones that you don't have to pay back). If you need help with either of these, visit the "Making Money" and "Money Saving Tips" sections here are Free Money Finance for some ideas that might work for you.

Comments

[Fruey (Let's Have It)]

Hi,

Credit is a big issue in the US. The whole economy works on easy credit and revolving credit. For every cent earned, more than a cent is taken out in credit. I don't know how it is that people can live beyond their means but they do.

Here's my article about rising debt per household in the US if you're interested: http://www.caperet.com/?p=61

-Fruey