People who find themselves in credit card debt have generally been using multiple accounts for some time. A lifestyle of financial trouble often starts innocently enough with the very first credit card that has a modest credit limit. Without a thought, the account is soon maxed out.
Rather than focus on changing their ways, the next step down this slippery slope is to open a new account and start the process over again. To be sure, having overwhelming debt is a problem, but the trickle down affects may come without warning.
There are a number of instances in which your credit accounts can be harmful to your future by negatively impacting your credit scores. Some are short-term and temporary; for example, you may see a drop in your score when you open several accounts within a short period of time. Wait out the decline and you’ll be back in business. Most damage is done by mismanagement of credit, especially when an account reaches a negative balance.
Perhaps the worst-case scenario is going into default on one of your accounts. It’s not simply a matter between you and the lender. Other banks, credit companies and lending institutions will know of your transgression and put measures in place in an attempt to protect against default. They may drastically lower your credit limit or even close your account and potentially affecting your way of life.
Once you reach the point where you can only afford the minimum payment on your credit accounts, the writing is on the wall for trouble in other areas of your life. Every purchase and especially automatic payments on the account are now vulnerable to default. For example, if you exceed the account balance when making your cell phone payment, the bill won’t be paid and those that follow behind, like your cable bill, will also go unpaid, unless you’re able to make a large enough payment in time.
Overdraw on an account and you’ll have the added insult of having penalty fees applied. This is in addition to the normal interest you would have paid. If your account is left in negative territory for too long, the bank could send your account to a collections agency in an attempt to retrieve the amount owed. They must notify you in advance, which is the only time you can fix the situation. Once sent to collections, you cannot reverse the process. Your only recourse at this point is to settle the balance you owe, as soon as possible. Keep in mind that the negative mark on your credit scores will be there for up to seven years.
It may be quite a challenge to put things right after years of poor financial planning. However, the benefits are worth the time and effort when you consider your other options. Without corrective measures, you may have your car repossessed, lose your home and end up filing for bankruptcy protection. While bankruptcy may clear out much of your credit card debt, the lasting affect will be trouble securing the credit you may need in the future. Putting in place ways to avoid any negative actions by your bank is a minor inconvenience in comparison to these devastating solutions.
Avoid automatic payments until you have a minimum of 60% of available credit limit on a card. Not only will you be guaranteeing that the funds are available, you will be demonstrating healthy credit management. The more available credit you maintain the better your credit score will benefit.
Pay off the lowest balance first. While some financial experts suggest tackling the account that charges the most interest so that you save the most money, it’s also important to see progress. By paying off smaller accounts, you’ll be encouraged by your actions and more likely to be discouraged. NEVER close an account; it has value! The number of accounts you have has no negative bearing on your credit score, as long as you keep them in good standing.
Consolidate you accounts. Using a balance transfer credit card to move multiple debts to one account will make bill paying easier and you will be less inclined to neglect it. One down side to consolidation is that banks may close your accounts, as soon as you transfer the entire balance. Banks will not close an account until there is a zero balance so even a few cents in an account can prevent the account from closing. If you are committed to paying on time, one way to prevent the loss of an account is by leaving a small balance and using the card for minor purchases each month. This keeps the account active and less likely to draw the attention of the issuer.
So if you feel like a financial failure, don’t become defeated by a few setbacks. Even the rich and famous have been known to get into a heap of financial trouble. As the old saying goes, “If there’s a will, there’s a way.” Commit to rebuilding your credit history with sound planning and reap the benefits of a future of financial security.
Christopher Arthur is a blogger and regular contributor to www.asapcreditcard.com. He writes specifically on finance related topics with a primary focus on credit and debt, but also enjoys sharing tips on frugal living and saving money. He strives to provide educational resources to assist consumers with their finance and money management decisions.
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