Credit cards can be a helpful way to purchase both luxury items and the everyday necessities. However, without careful oversight, credit card debt can accumulate quickly. Some credit cards have high credit limits, but the interest that accrues on those credit cards can make it very difficult to pay off the debt. It is easy for consumers to fall behind on credit card payments and get in over their heads in credit card debt.
In order to avoid a pile of credit card debt, pay attention to the following red flags -- they are indications of excessive credit card debt:
Only Making Minimum Monthly Payments
Only making the minimum monthly payment (often as low as $30 per month) does not afford much chance for the consumer to pay off high credit card debt. The interest that accrues each month on the debt often exceeds the minimum monthly payment, so it takes the consumer a much longer time to pay off the debt.
Ideally, the consumer should only accrue as much credit card debt as can be paid off in full each month. If this is not possible, the consumer should not accrue more debt than can be paid off in full in two to three months. Beyond this, the consumer is carrying excessive credit card debt and risks not being able to pay off that debt.
Not Making Minimum Monthly Payments
After other monthly household expenses are paid, some consumers do not have any funds left over to make payments toward credit card debt. This is a sure sign that the consumer has excessive credit card debt. Failing to make any monthly payment toward credit card debt will not only cause interest to accrue on the debt, it could also lower the consumer’s credit score. Over time, failure to make payments can also lead to collection actions by the credit card company, including possible wage garnishments and bank levies. To learn more see Nolo’s Wage Garnishment topic area.
Borrowing From Retirement Savings to Pay Credit Card Debt
It may be tempting to cash out a 401k or other retirement savings account in order to pay off credit card debt. However, consumers must pay taxes on the amount cashed out of the retirement funds, so right off the bat the consumer loses a portion of the investment.
Also, these investments are supposed to be used by the consumer later in life when the consumer wants to retire and has limited income. By cashing out now the consumer loses all of those savings and has to start over again to replenish those accounts.
Finally, cashing out savings to pay off credit card debt only works if the consumer is not going to incur any more credit card debt. Often the consumer will see the retirement cash-out as an easy fix and then proceed to rack up credit card debt all over again. This does nothing to alleviate the consumer’s financial woes and is a sure sign of excessive credit card debt.
Borrowing Against Real Property, Vehicles, or Other Assets to Pay Credit Card Debt
Using a home or vehicle as a defacto ATM in order to withdraw funds to pay credit card debt is almost always a very bad idea. By cashing out equity in a house, vehicle, or other real property to pay credit card debt, the consumer has effectively turned an unsecured debt into a secured debt. (Learn about secured and unsecured debts in our Dealing With Debt topic area.)
If the consumer cannot pay for the credit card debt outright, the consumer will most likely not be able to pay off that same debt in the form of a second mortgage or vehicle loan. This means the consumer is still stuck with the debt and now risks losing his house or other property if the debt is not paid off.
Transferring Debt Between Credit Cards
Although it can sometimes be a smart idea to transfer credit card balances from high interest cards to lower interest cards, this plan only works if the consumer is able to then readily pay off that transferred debt. If not, the consumer is still stuck with the high debt and is still in over his head.
Postponing Necessary Monthly Expenses to Pay Credit Card Debt
If the consumer cannot pay for necessary monthly expenses and instead uses income to pay credit card debt, the amount of credit card debt carried by the consumer is too high. Foregoing necessary medical treatment, medication, or not paying taxes in order to pay credit card bills is ill-advised and can escalate the consumer’s financial problems.
Lowered Credit Score
If the consumer has so much credit card debt that it causes a lower credit score, the consumer is in over his or her head. Credit scores fall when the credit reporting agencies have reason to believe that the consumer is at higher risk of not being able to repay the debt. Failing to making monthly payments, or making only small monthly payments is a warning sign of excessive debt and may cause the reporting agency to lower the consumer’s credit score.
What to Do If One of These Red Flags Applies in Your Situation?
The first step to alleviating credit card debt is often the simple acknowledgment that your debt is too high. Once you realize this, you can take steps to alleviate the debt and regain some financial well-being. To learn how, see the articles and Q&As in Managing High Credit Card Debt.)