This is part two of describing the 5 phases of your debt cycle: using available credit as a source of emergency funds. If you missed the other articles, you can read them here:
Just to recap, the first phase of your debt cycle involves early warning signs of financial trouble. It talks about not having an emergency savings fund to cover unexpected expenses. In order to break out of that cycle, you have to learn how to save money and regularly increase your emergency savings fund.
The next step in the cycle is using credit cards as a fallback. Most people who start to overspend will soon realize that their available cash in their bank is starting to get depleted. When it comes time to paying utility bills or cable bills, they become nervous about using all their available cash. So instead, they decide to use their credit cards to pay cover their monthly bills and decide to pay off the balance next month.
When the following month comes around, it’s difficult to come up with the money to pay off your balance in full. After all, you weren’t able to pay your bills in cash last month, so it’s unlikely that you’ll be able to pay it off in full this month. It slowly becomes a habit to pay off “slightly” more than the minimum payment due in order to make sure you have enough money to cover all the necessary expenses, such as food and rent/mortgage. In order to break out of this cycle of using your available credit, there are a few things you can do:
Quit Using Your Available Credit
1) Talk to your Creditors: At this point, you shouldn’t be seen as a customer with a high default risk profile. You’ve been paying slightly more than your minimum payments every month, so you’re definitely on good terms with the creditors. Ask your creditors to see if they can offer you a lower interest rate but make sure you don’t tell them that you’re financially struggling. Creditors have different rules for lowering interest rates for prime and high risk consumers. The main differentiator being that high risk consumers will have their accounts closed.
2) Stop Using Your Cards: This might be obvious, but it’s a lot harder than it sounds. The best thing you can do to stop the bleeding is to simply stop making additional purchases. In doing so, your balances wont’ be growing, and it will be a huge step in paying off your credit cards. So you’re probably wondering how you’re going to come up with the money to pay your bills. Finding a second job is probably unrealistic, so I’m not going to advise that for now. However, there are immediate actions you can take to reduce your monthly expenses, which I’ve outlined in the first series about how to save money. In the mean time, I listed 4 ways you can find work fast to supplement your income.
What NOT to do:
1) Payday Loans: Payday loans can have your finances spiraling out of control in no time. These loans carry interest rates up to 400% and are deadly traps. It’s easy to get a payday loan these days, since a lot of lenders let customers sign up on their website, and have the money direct deposited the very next day.
2) Cash Advances: Using your cash advance from your credit cards will only make you pay off your debts even longer. The reason is because you’re going to end up paying off the “standard” purchase first, before you begin to pay off your cash advance balance. The reason is because your creditors want you to pay as much interest as possible. You have no choice in which balance to pay off first. Oh yeah, and not to mention, cash advance interest rates are usually 24.99-29.99%. Ouch!
The single most important thing to do is to stop the bleeding. If you find yourself using your available credit to pay for your monthly bills, take proactive steps to make sure you’re not digging yourself a deeper hole. Our next article will teach you what to do if you’re overextended on your credit and only paying the minimum payment amount.