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  • 10 Tips to Avoid the Debt Trap

    Have you ever thought about why so many of the people you know are struggling with debt? Do you ever wonder why banks keep lending to certain individuals, even when they are falling behind on their payments? Did you know that debt problems are a leading cause of major societal problems, such as stress, divorce and alcoholism?

    When it comes to extending credit to Americans, there are big winners and big losers on each end of the transaction. The largest banking companies in America earn major profits from the big appetites that consumers have for unsecured debt. At the same time, many individuals lack adequate savings, and this makes them particularly vulnerable to leaning on those banks as a last resort to make ends meet. The story that unfolds is often likened to David versus Goliath, except Goliath never loses.

    Debt is like a disease that starts small and can quickly spread through one’s entire life. For many people that are living paycheck-to-paycheck and lack an adequate savings plan, just one bump in the road can cause a complete breakdown. Unfortunately, most consumers do not have adequate knowledge about managing their money, as financial planning is not a subject that is typically taught in schools. A bit of homework on personal debt management and preparing a financial plan for the future can go a long way.

    When it comes to credit decisions, it is important to understand that not all debt is bad, and there are situations where certain types of debt are necessary and helpful. An example of good debt is taking out a mortgage for the purchase of a family home, or buying equipment to help an entrepreneur grow their business. On the other had, bad debt is generally used to finance one’s ongoing spending and lifestyle habits. This includes credit cards, personal loans or even payday loans, all of which usually carry high interest rates and associated costs.

    Still, everyday victims emerge from poor money management and start on a journey to financial independence. To help prevent a dependence on bad debt, here are 10 tips for avoiding the debt trap:

    1. Spend less. Don’t buy something unless you can afford it. While that is easy to say, it can be a tough rule to live by. We are creatures of instant gratification and often want to have things now without fully considering the cost. Create a challenge for yourself to see how many areas of your spending you can cut back on, without compromising your needs and personal happiness.

    2. Share budget goals with the family. Anyone trying to fulfill savings goals should have a budget and share it with the whole family. Break down the budget into categories, such as food, utilities, allowances and entertainment. If the family unit is all working together to meet mutual goals, then sacrifices can be shared and understood on everyone’s part. For example, taking a road trip and lodging with relatives on a vacation might be more prudent than signing up for flights and hotels on the next family getaway. Or make a challenge out of grocery shopping, by only taking a set amount of money into the store, forcing frugal choices. The more creativity you can put behind staying on a budget, the better!

    3. Buy on sale. These days most prices are negotiable, so wake up the bargainer inside of you. Great deals and coupons are everywhere, if you take the extra time to look for them. In a recession, the stores need your money a lot more than you need their goods. The internet is an amazing tool to score the best deals and prices on significant purchases.

    4. Ignore credit card offers. Credit cards should only be used for emergencies. If you are using them for convenience or to build rewards points, only spend what you can pay off in full every month. Even using debit cards can make it challenging to track whether you are spending more than you can afford. It’s best to pay cash when you can, and if you don’t have the money, think hard on whether you need the item in question.

    5. Pursue economical hobbies. Look for hobbies that are fun, but more importantly that are also economical. Inexpensive recreation is abundant, and just requires you to get your creative juices flowing. Having ample hobbies and activities in your schedule can also help keep you from otherwise being on the spending circuit. Make sure to always leave enough room in your budget for those activities you enjoy most – they are priceless.

    6. Pay off credit cards. If you have balances sitting on credit cards, pay them down as fast as possible. Do not make the minimum payment, as that payment is meant to keep you in debt for a very long time. Even on a zero interest rate credit card, work to pay off the debt in the three to six month time frame before the offer ends.

    7. Avoid eating out. Cook at home, and if you don’t cook, take some time to learn how. The average price of a meal out costs far more than if you were to cook at home. The savings will add up fast if you are used to eating out 1-2 meals a day. In addition, home cooking is usually a lot lower in saturated fats, calories and sodium. There are multiple benefits to staying home for a meal.

    8. Window shoppers beware. Reconsider the habit of window-shopping, trying things on, flipping through magazines or catalogs, or browsing eBay on the internet. These practices can stir up desires for items you really don’t need. Instead, keep a shopping list of the products you need or want, and shop with discipline when you head to the store.

    9. Set up an exercise schedule. There is no substitute for a good workout. Not only will you be feeling better, you fitness is a healthy alternative to spending money. Good exercise only requires your setting aside some time, and generally that time is returned to you from the extra energy boost in your day. Even if you are not a regular at the gym, you can meet with friends for a run, dust off your bike or take your dog on a long walk.

    10. Savings is critical. If you don’t already have one, make sure to set up an emergency fund right away. Allocate a set amount every month to continue building that fund over time. Most people get into debt simply because they have no savings to hold them over when rough patches come along. If you have a family, this may be the most important item on the list.

  • Consumers tax cut money to pay down credit card debt

    Consumers tax cut money to pay down credit card debt Social Security taxes were cut in January, but the month only saw consumer spending increase 0.2 percent despite a 1 percent increase in incomes, according to a report from Bloomberg News, which cited data from the U.S. Department of Commerce. However, spending likely remained relatively unchanged because Americans put more of their money into paying down credit card debt balances instead.

    "One or two percent in your paycheck is not going to change the way you live," Marshal Cohen, of the NPD Group in Port Washington, told the news agency. "It'll make living easier. What it will do is keep you spending the way you've been spending, so it will keep the status quo."

    In all, consumers have concentrated on decreasing their credit card debt for the better part of the last two years. However, nationwide credit card debt balances increased only slightly in the final month of 2010 despite considerably more spending on these accounts during the holiday season.

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  • Mounting credit card debt makes it difficult for consumers to make bill payments

    Mounting credit card debt makes it difficult for consumers to make bill payments While many consumers are getting a better handle on their credit card debt, some are still having so much financial trouble that they're missing payment on at least one of their major monthly bills, according to the latest statistics from the Consumer Reports Trouble Tracker Index. Overall, 9.7 percent of consumers reported that financial constraints caused them to let at least one important payment fall delinquent in the previous month.

    This group of consumers often cited changes to their credit card agreements as one of the primary reasons they could not meet their obligations, the report said. In particular, alterations to interest rates paid on existing credit card debt, penalty rates and fees applied to accounts that had already become delinquent, as well as reduced credit limits contributed to their economic troubles.

    However, consumers with lower household incomes – those earning less than $50,000 a year – were affected by these problems at a disproportionate rate, the report said. Of these consumers, 14.1 percent reported they had missed at least one major bill payment in the previous month. Exacerbating their problems is a considerably higher rate of unemployment, where 11.7 percent of this group lost their job during the month, compared to just 6.7 percent of all consumers.

    In addition, many consumers faced financial problems related to medical problems, the report said. About 17 percent said that much of their money was siphoned off by medical bills and medication they could not afford, and 9.3 percent lost or saw shortfalls in the healthcare coverage.

    These troubles came even as more consumers seemingly have a better handle on dealing with their credit card debt. All of the nation's major credit lenders have reported considerable improvements in both delinquency and charge off rates in recent months. However, some financial experts say this is also a function of many consumers who had previously defaulted can no longer qualify for new lines of credit of any kind, even as lenders once again loosen restrictions.

  • Consumers less of a credit risk as demand sinks

    Consumers less of a credit risk as demand sinks The rate at which consumers had trouble paying down their credit card debt declined by 0.9 percent in the fourth quarter of 2010, according to the latest statistics from the credit monitoring bureau TransUnion. This marked the fourthconsecutive quarter in which consumer credit risk declined, and left the company's Credit Risk Index 3.13 percent lower than it was at the end of 2009.

    Overall, 49 states and Washington, D.C., saw declines in the rates at which they struggled with credit card debt, the report said. Wisconsin, the only state that saw an increase in its total risk, is still well below the national average. The states that had the highest risk were Nevada, Mississippi and Texas, while North Dakota and Minnesota had the lowest.

    Meanwhile, consumer demand for new credit card accounts continued to fall as well, the report said. The number of inquiries made by consumers dipped 5.7 percent on a year-over-year basis, declining in 42 states and the District of Columbia. Alaska, Vermont and Wyoming had the highest increases in new inquiries, while Florida, Nevada and Virginia saw the steepest declines. However, the year-over-year drop observed in the fourth quarter of 2010 was considerably lower than those between the same periods in 2007 and 2008 (16.5 percent) and 2008 and 2009 (19.3 percent).

    "The gradual decline in the Credit Risk Index, coupled with a 5.4 percent decrease in the demand for credit over the previous year, as reflected in TransUnion's Total Inquiry Index, suggests that consumers are relying more on existing credit or switching to cash or debit cards," said Chet Wiermanski, global chief scientist at TransUnion. "While more consumers will have stronger credit profiles making them attractive to credit marketers, the underlying demand for credit appears to still be soft."

    Financial institutions are once again loosening restrictions on what type of people they will lend to, but many consumers have also been locked out of the borrowing system entirely thanks to a past history of delinquency and charged off debts that effectively crippled their credit ratings.

  • Consumers unexpectedly took on more credit card debt in December

    Consumers unexpectedly took on more credit card debt in December The amount of revolving credit – the type most commonly associated with consumer credit card debt – carried nationwide spiked in December, reversing a trend of continued declines that had lasted more than two years, according to the latest monthly statistics from the Federal Reserve Board. Overall, credit card debt climbed 3.5 percent to $800.5 billion, up from the $798.2 billion recorded in November.

    However, even despite the increases, credit card debt still declined from the third quarter, when it finished at $806.1 billion, to the fourth, the report said. Similarly, it was down significantly from the figure observed at the end of 2009, when it was recorded at $865.8 billion.

    The increase came as a bit of a surprise to some experts, as many polls found consumers pledging to use alternative forms of payment, including debit cards and cash, to purchase gifts during the holiday season, rather than taking on more credit card debt.

  • CFPB accepting public’s suggestions for regulatory changes

    CFPB accepting public's suggestions for regulatory changes The newly created Consumer Financial Protection Bureau is now accepting the public's suggestions for changes to the credit card lending industry, and is soliciting ideas via a number of online channels. Suggestions can be sent through its new website, www.consumerfinance.gov, as well as throughemail, Twitter and even YouTube.

    In conjunction with this, the agency recently launched a Facebook page, Twitter account, YouTube channel and Flickr gallery to help consumers stay abreast of any changes it makes that could affect their credit card debt, the report said.

    "We want to make sure that the American people are with us all the way while we build it," said Elizabeth Warren, the law professor tasked with setting up the CFPB.

    The CFPB has already suggested a number of changes to the way companies can handle consumers' credit card debt, but will not gain full regulatory power over the lending industry until the summer.

  • High interest rates on credit card debt plague those with poor history

    High interest rates on credit card debt plague those with poor history While these Americans were likely unable to find lines of credit for some time following such an incident, they may find that they are once again being approved by lenders.

    However, consumers with spotty credit histories may find that the new lines of credit for which they are now being approved will have heightened interest rates on credit card debt that need to be carefully monitored, according to a report from CNN Money. Often, lenders will draw in consumers desperate for lines of credit with relatively low introductory interest rates – usually around 29.9 percent – before hiking them as high as 59.9 percent or in some cases even 79.9 percent.

    "A lot of the people ran up the card, defaulted and went directly to charge off," First Premier Bankcard chief executive officer Miles Beacom told the news site. "We also tested it at 23 percent, 33 percent, 45 percent, but 59.9 percent is the one that shows the best performance and where the organization can market the product."

    First Premier Bank has had almost 700,000 consumers sign up for its bad credit account, and more than half carry a balance from one month to the next, meaning consumers are quickly adding to their credit card debt, the report said. However, this practice is not illegal.

    The Credit Card Accountability, Responsibility and Dislcosure Act, passed in 2009, only prohibits lenders from retroactively raising interest rates, the report said. But because these consumers agreed to them initially – likely without reading the agreement's fine print – they are stuck with the high interest rate.

    Beacom also noted that First Premier cards for consumers with bad credit histories used to charge high fees in addition to the high interest rates, at least until the Credit CARD Act altered the rules related to how high these charges could climb, the report said. Currently, it opens about 50,000 new accounts every month.

    Consumers with a history of struggling with their credit card debt will likely have an easier time dealing with their accounts if they spend less with the cards and pay off their entire outstanding balance every month.

  • Mobile options will change payment process for banks, consumers

    Mobile options will change payment process for banks, consumers The idea of being able to use a smartphone equipped with a near-field communication chip to take on credit card debt when making purchases has gained prominence in recent months, as many companies have tested such systems in small groups, according to a report from CNBC. However, it's a question of "when," not "if," this technology will catch on with cardholders, meaning banks will have to adapt to the popularity of the payment method.

    Already, most major financial institutions offer mobile banking applications for smartphones, and despite their popularity, customers may find them frustrating to use, the report said. For example, Bank of America's app has been downloaded 6 million times and is used by 100,000 people a day, but is only rated 1.5 out of 5 by cardholders.

    This change in consumer attitudes toward mobile banking and credit card debt will force lenders to try to keep up with consumer demand for the latest technology.

  • Small businesses sought fewer credit cards last year

    Small businesses sought fewer credit cards last year Only 48 percent of small businesses sought accounts that would allow them to take on credit card debt to grow their companies in 2010, down from 55 percent in 2009, according to a new survey from the National Federation of Independent Business. This decrease was likely because 15 percent of those polled thought they would be unable to qualify for a new line of credit.

    However, those that did seek new accounts that allowed them to take on credit card debt were approved at a higher rate than they were in 2009, the report said. Just 16 percent of applicants were denied altogether, while 41 percent got all the credit they sought.

    "Unfortunately, the economic atmosphere for small businesses did not improve much in 2010," said Denny Dennis, NFIB Research Foundation senior fellow and report author.

    A number of studies have shown that if small businesses are able to take on credit card debt, they are in a better financial position to turn a profit and increase payroll.