- When a person accepts goods, money or services and does not pay for them, he has gone into debt. The most common form of debt is unsecured credit card debt. A huge portion of the population carries a balance on credit cards from month to month. Although debt can be overwhelming, it is possible to lower your balances and become debt free. The first step in this process is understanding how people wind up in debt.
- Credit card offers promise low introductory rates, but even if the lower rate is extending beyond the introductory period, keeping it is difficult. When a person applies for a credit card or accepts an offer of credit, she is entering into a contract with the financial company. This contract contains terms that are legally disclosed to the consumer, sometimes in smaller print. Unfortunately, most people who activate a new credit card do not read or understand these terms.
- The basic terms of the credit agreement state that the borrower can charge a certain amount of money on his card and promises to pay that money back. He can take as long as he likes as long as he pays interest on the balance and makes a minimum payment each month. Debt trouble begins when he spend more money than he is earning and begins to accumulate a large balance. The larger the balance, the larger the finance charge. The situation becomes sticky if the borrower is late on a monthly payment; in most cases, this will cause the interest rate to rise, spiraling to a rate perhaps 10 times higher than that introductory rate.
- Once a person enters the cycle of debt--overspending, paying the monthly minimum, paying late--it is difficult to get out. Finance charges from high interest rates eat away at her monthly income, leaving her with less cash to spend; as a result, she puts more purchases on the credit card and the cycle deepens.
- Since the debt relationship is voluntary--the consumer has no obligation to borrow anything from a credit card company--the companies are free to set any terms they wish, if the consumer agrees to them. The debt cycle can be broken, however. The most drastic solution is bankruptcy, which can wipe out many of your debts. This action is a last resort, as it damages your credit and may be used against you when you are applying for a job. Less damaging solutions include taking on a consolidation loan for all of your debts; entering a debt management plan, where you pay a fee to a nonprofit organization to consolidate your payments and negotiate for lower rates; and simply cutting up your cards, taking a second job, and slowly chipping away at your balance.
