Friday, December 14, 2007

Manage your debt do not add debt

In India most of the people are living paycheck to paycheck. When people are not left with spare cash credit cards make an attractive option to finance necessities such as getting the gas filled in your car, buying groceries and clothes etc.
People are in a habit of overspending one’s future earnings at a time when the economy is booming. But in case of credit cards it becomes necessary to keep a check.
When people start using plastic money for these recurring expenses then there rises the problem of out of control debt. There could be many reasons for this like easy availability of credit cards, intensified marketing campaigns to boost profits etc.

Especially young men and women earning small salaries and spiraling financial responsibilities easily get tempted with credit cards to help them get through the month. This along with the burden of student loans adds to the debt burden faced by them.

According to statistics available shows that in a month, an average household receives eight credit card offers and on an average an individual has around three credit cards.

Credit cards have two distinct features:
a) A convenient medium though which one can spend first and pay later in full
b) The ability to spend higher levels than would be otherwise possible
People think that they can pay off the debt whenever they get a better job or that they would be fine as long as they make the minimum payment.

There are charges and fees from which the credit card company earns the income. With credit card companies charging interest rates as high as 2.95 per cent and including fees for late payment, transaction fees, penalty if the account balance is over the limit, penalty if payment is not honored etc, fee income accounts to almost one-fourth of the credit card companies’ total income.

One should keep track of their spending for some months to see where they are spending their money.

All over the world, people are trying out various techniques to get rid of plastic money trap and manage better their debt problems.

One such method is “Debt Consolidation”. It means replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. Rather than paying off several separate bills each month, a consumer consolidates his / her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time.

But one's worries are not over if one adopts this approach. Debt consolidation also have limits it is also not without problems. In America, if a person takes a home equity loan or any other loan to pay off credit cards end up with the same debt load within two years. It again feeds on the same tendencies that got the consumer in his present position in the first place. By taking yet another creditor, one is adding even more fuel to the fire. In the end, it is the consumer's money that is burning. Also if a consumer is already buried under debt, chances are that he won't get qualified for those low interest rates.

To come out of debt trap what is required is debt management and not debt addition. Getting professional help in managing debt can help change credit behavior. People that have taken on too much debt tend to go into denial; they'd rather not know how much debt they owe. A professional debt manager will make them face up to their obligations.

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