Credit card companies often prey on everyday consumers. In most cases, consumers believe they possess enough discipline to take full advantage of the benefits numerous credit card companies offer without falling victim to staggering interest rates. However, there are a plethora of consumers who are unaware of how to manage their finances or how the cards work.
Many discover that even if they closely monitor spending, earnings, payments and understand how the charges work, it doesn’t matter how financially savvy one is. Unfortunately, emergencies happen and circumstances change. A big change can cause several missed payments and exponentially increase debt.
For example, maybe last year your Christmas presents were purchased on the credit card because the annual Christmas bonus was on its way. Yet unfortunately, the company giving out the bonus was affected by the down economy and gave less to the employees or didn’t give a bonus at all. Maybe there were some job cuts instead of a Christmas bonus. Maybe the credit cards were being used to fill the gap until that job “you just knew you had in the bag” started, but somehow, they gave the job to someone else. Where does that leave you? All of those charges turn into interest being tacked on and payments compounding.
So you have accumulated some debt with student loans, a mortgage, paying back a car loan, and a credit card. Most of your paychecks go toward paying your bills and those random things like going out to eat, buying little luxuries and saving a little bit of what’s left over. You are making your interest payments on all of your debt so there’s no reason to worry, right? Wrong.
Families are effected by excessive debt in three big ways:
Limits purchasing power
Obviously, spending power with a credit card can be increased, which, to some, is the point of having a credit card. While it does increase spending, if the balance is not paid off eventually the credit card will become more of an expense and less of a supply of extra money. When this tilting point is reached, purchasing power is reduced. Income starts going toward paying interest and paying down the principal. Depending on how much debt you have, this could be a significant reduction in discretionary income. You cannot afford to not make payments on your debt because that will put you in an even worse position next month. If you miss too many payments, you could be foreclosed on or have your car repossessed. Debt can reach a point that it dictates what you do with your paycheck.
Limits financial flexibility
You are satisfied with where you are living. Of course, you wouldn’t be opposed to a nicer place, but where you are is comfortable and fits your needs. You recently heard from an old friend that the company they work for is looking for someone just like you. It’s a great job, in a place that you’d love to live (on the beach, near your family, etc), and it pays quite a bit more than your current job. Should you apply? What if your boss finds out? If you get fired before you land this other job, you’ll be in trouble. Your finances are stable at the moment, but if you don’t have a job for a couple of months, you’ll be in trouble. Bills will pile up, interest will be compounded, and you’ll be drowning in your debt. Debt can prevent you from improving your life because you won’t be able to take those chances or risks of missing out on the income you already have and depend on.
At first, it may start as not being able to buy that extra present during the holidays. Then, maybe you have to cut back on how often you go out to eat, but a home cooked meal never hurt anyone. Eventually though, it may escalate to the point that you can’t afford to go out and get the newer car, despite really needing it. You might be bound by not being able to afford to make a large purchase so you repair your older car. Hopefully, it doesn’t break down like you expect it to do. Maybe your debt gets to the point that you have to move to a cheaper area to regain some of the spending capabilities you lost when the bills started piling up. We all want to have the option to get something better. If we get into debt trouble, our choices could be made for us.
Overall, I have one simple tip: Reduce your debt now!
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