personal wealth health

Take Charge of Your Debt

Avoid using credit cards to spend more than you can afford.

WILLIAM J. LYNOTT

Funny thing about debt: Either you manage it, or it manages you. That’s why it’s so important to understand the pitfalls that lie in wait for anyone who takes a casual view of spending money that must be repaid.

Arguably, there is no more dramatic illustration of the destructive potential of unmanaged debt than today’s use of credit cards.

Credit card debt dangers

“Charge it” is the anthem of credit card issuers who are happy to lend you their money for your purchases, knowing full well that a large percentage of users will be drawn into the company’s highly profitable “minimum amount due” trap.

The average American household with at least one credit card had nearly $15,950 in credit-card debt in 2012, according to Credit Cards.com. Anyone with that kind of balance due on a credit card has almost certainly been sucked into the ploy of “minimum amount due.” By overspending their limits and paying only the minimum amount due each month, these unfortunate victims are saddled with an average interest rate on the balance that runs in the mid-to-high teens at any given time.

For many, that combination of high debt and high interest rates produces a perfect storm of unmanageable debt from which it is extremely difficult to escape.

Debt advice

The rational way to use credit cards is to spend no more than you can pay in full every month.

For many people, that advice comes too late. For anyone saddled with credit card and other types of debt, strong debt management medicine is the only cure:

► Stop further credit card purchases and unnecessary spending entirely.

► Pay down the balances of loans or credit cards that charge the highest interest rates. Do this first while paying at least the minimum due on all your other debt. Once you’ve paid off your highest interest debt, pay down the next highest, and so on.

► Don’t borrow more money against your home or your 401(k) to pay off your existing debt. What may seem like an easy solution could cause you to lose your home or undermine your retirement plans.

► Avoid most companies that offer to “consolidate” your debts into one easy-to-pay-off loan. In many cases, this does nothing more than add another layer of debt. While there are reputable non-profit debt counseling agencies that may be able to consolidate debt and assist you in finance management, there are also a lot of disreputable agencies to avoid. Research carefully before taking this course to manage debt.

(For more information on managing a heavy debt load, visit www.smartmoney.com/borrow/debt-strategies/help-im-drowning-in-debt-9652.)

Limit your spending

Like castor oil, the medicine required to bring unmanageable debt under control is difficult to swallow.

The sensible way to avoid the catastrophic effects of overspending your limits is to start with strict personal discipline in the use of credit cards. Remember to never spend more than you can afford to pay when the bill arrives. OM

MR. LYNOTT IS A FREELANCE WRITER WHO SPECIALIZES IN BUSINESS MANAGEMENT AS WELL AS PERSONAL AND BUSINESS FINANCE. VISIT WWW.BLYNOTT.COM, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.