by Jennifer Hicks
You've heard the come ons. You can have it now. You've worked hard; you deserve it. Play now, pay later. And then, one time, you believed. You applied for the magic card and bought a big screen TV or a trip to Barbados.
Then you got another card. And another. And it was oh so easy to buy what you wanted.
Now you wake up at night in a cold sweat. How will you pay those bills?
You're not alone. A few million American consumers lie awake with you.
Ten percent of your take-home pay is considered a comfortable debt load. Fifteen percent might be manageable. But, if you're nearer to 20 percent (or more) you're probably in too deep and losing far too much sleep.
In 1997, close to 1 million of those tired souls filed for chapter 7 bankruptcy according the Administrative Office of the United States Courts. Their average debt, not including their home mortgage, was $47,000--most of that in credit card bills. The result? Nearly $6 billion of debts were forgiven. Nearly all filers walked away with no credit and a blemish on their credit so severe, they'll need to rely on cash for all their needs for the foreseeable future and beyond.
Yet, with each week, many of us see new offers for bigger and better credit cards in our mailboxes. In fact, last year, 2.4 billion pieces of mail were sent, urging us to apply for yet another card.
Credit is powerful tool. But, effective management of it is vital in these days of easy credit. Your financial health depends on it. Look at the questions below. If you answer "yes" to two or more of them, make some changes without delay:
- Are you often near the limit on your credit cards?
- Do you pay only the minimum?
- Do you use credit cards to pay for food, gas and other daily needs?
- Are you behind on payments?
- Do you have little or no savings?
- Have you consolidated your debts into a single loan, then piled up bills again?
- Have you canceled insurance to pay bills?
- Have you been denied credit?
What to Do
Most personal finance experts agree that a series of steps is essential to take charge of your financial well being.
Stop Using Credit
Overuse of credit cards got you into this mess. Don't add to it. Cut the cards in half. Return them to the issuer. Save one for emergencies.
Contact Your Creditors
Call them before they call you. Let them know you can't make your payments. Perhaps offer to make lower payments over a longer time period.
Credit counseling services are available. Call the nearest Consumer Credit Counseling Service (CCCS), 800-388-2227, or contact the local Cooperative Extension Service office. These groups will work with you to itemize your debt, create a reasonable budget and repayment plan and help you contact your creditors to arrange for alternative payment plans.
Debt Consolidation Loan
Consider asking a bank or financial institution about combining or "consolidating" your debts into one loan. In this case, the new loan will pay off all your debts and you need to pay just one creditor. Shop around for the best interest rate you can find.
Bankruptcy should be a last alternative. Bankruptcy is a legal act with loads of implications.
Before You Get in Trouble
Look for ways to save. You can often save several hundred dollars each year by paying your charge card purchases in full. If you must carry a balance, switch to a no-cost credit card with a low annual percentage rate (APR). Get rid of all but one or two charge cards to reduce the credit card fees you're paying. Freeze your use of the cards--literally. Take the cards out of your wallet and put them in a small plastic bowl. Fill the bowl with water and freeze. This forces you to examine whether you really need to charge that next purchase.