You've probably heard plenty of horror stories about how people have ruined themselves financially by building up mountains of credit card debt. However, millions of consumers use credit cards every day without ever running into trouble. If managed properly, credit cards can be valuable tools. You can safely use them to make convenient purchases and build your credit rating.
You just have to be cautious with your credit card spending, knowing when and when not to charge purchases. And you need a debt escape plan if you do get in over your head.
How to Avoid or Deal with Credit Card Debt
The best way to deal with credit card debt is to avoid it altogether. This doesn't mean that you have to avoid credit cards, just accumulating large balances. If, however, you have accumulated some debt, there are ways to get yourself back on track.
Don't Accumulate Balances
It is possible that an emergency could come up and force you to charge an amount that you can't afford to pay off. In this situation, it would be reasonable to pay down the balance gradually. You could then think of the interest fees as a "convenience cost." But you should never use a credit card as a means to overspend. By only charging what you can afford to pay every month, you can build your credit score without building debt. You will also avoid having to pay interest fees.
Use the Right Kind of Credit
If you need to make a large purchase, and you don't have cash on hand, consider taking out a personal loan. Of course, if you have a credit card with a good interest rate attached, go ahead and use it to buy what you need. On the other hand, if you only have access to a card with an 18%+ APR, you may be able to save a little money by using a short-term, personal loan to make your purchase. Just be sure to shop around for competitive rates and plan to make every loan payment on time.
Be Careful with Your Utilization Ratio
If you are using more than 30% of any of your credit lines at any given time, it looks like you're relying too much on credit. In fact, your credit score can drop even if you are never late with a payment. Also, if you have credit cards that are maxed out, you're probably on a fast track to debt. Now is a good time to stop using your cards until you've paid down your balances.
Don't Hesitate to Ask for Help
If you get behind on payments, your credit card company is under no obligation to offer assistance. But, in order to keep you as a customer, they may be willing to arrange a more affordable repayment plan. Or, they may temporarily reduce your interest rate. If you are several months behind with payments, you may be allowed to settle your account with a lump sum that is less than what you actually owe. Just be aware that "forgiven debt" is often reported as taxable income. So, be prepared to pay taxes on any credit card debt that is voluntarily eliminated by a creditor.
If you are just starting out with your first credit card, remember that massive credit card debt typically doesn't happen overnight. It usually starts with minor negligence and occasional overspending that gradually gets out of hand.
If you are disciplined with your credit card use, you will develop positive habits that will build good credit. However, if you have made mistakes and damaged your credit, it is never too late to turn things around.
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If you have bad credit and need to buy a car, financing your vehicle purchase with a bad credit auto loan will provide you with an excellent opportunity to rebuild your credit. You can increase your credit score as you pay off your loan by making every payment in full and on time.
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