Have you ever opened your credit card statement only to find that despite last month’s payment, your unpaid balance has actually increased because of credit card interest, penalties or fees?As a practicing consumer bankruptcy attorney in Atlanta, Georgia for over 25 years, I know that out of control credit card debt can force people in to Chapter 7 or Chapter 13 bankruptcy. In many cases credit card debt that was manageable becomes unmanageable because of common mistakes made by individuals in how they handle their credit card debt.If you can avoid these mistakes you may be able to avoid the stress and financial distress caused by excessive credit card debt.How Credit Card Debt and Credit Card Interest can Get Out of ControlThe first step towards controlling your credit card debt involves your spending. This may seem obvious but many of my bankruptcy clients fail to recognize this reality. If you find yourself carrying a balance (rather than paying off your debt in full at the end of the month) you need o change your usage habits. If you carry a balance you will end up paying unnecessary and expensive credit card interest.Your credit card is not a substitute for cash – instead your credit cards represent a high interest loan with a 20 days repayment term. Interest on unpaid balances will eat you alive. Most cards obligate you to pay an 18 to 20% annual interest rate on balances carried more than 20 days. To give you some perspective, your interest rate on mortgage debt will end up in the 3 to 4% per year range, and the annual percentage rate on your car note will generally be 5 to 6% per year.As a rule, if you make only the minimum payment, your balance will stay the same, or actually increase month to month indefinitely. And if you are 1 day late, you will likely get hit with a penalty (often $35 or more) plus your interest rate may be increased to 28% or higher.Banks earn huge profits from consumers who consistently maintain monthly balances while making minimum payments and occasionally missing a payment deadline. I have represented numerous clients over the years whose $20,000 balances never changed despite hundreds or even thousands of dollars of payments over years and years.Credit cards can be a convenience – you can avoid the risks associated with carrying cash. But if you do not pay your balance in full each month, that convenience becomes an expensive, high interest short term loan that can cost you thousands of dollars.Step One – Stop Using Your Credit Cards and Create a BudgetThe rule of thumb I offer to my clients is simple: if you find yourself carrying a balance for more than 2 months, stop using your credit cards. If you do not have enough money in your budget to pay your bills without accessing short term credit (i.e., your credit cards), cut out all unnecessary expenses and/or get a part time job. Step one is to stop the bleeding by balancing your household budget.If your budget does not balance, everything should be on the table – and this includes cutting out or reducing expenses such as:
- restaurants
- entertainment (movies, premium cable channel)
- expensive cell phone plans
- magazine and newspaper subscriptions
- reducing your insurance coverage to get a cheaper premium
- electricity and gas by changing your thermostat and taking shorter showers