Friday, October 17, 2003

What Tends to Aggravate Debt?

What Tends to Aggravate Debt?

Many people who own credit cards can attest to the fact that it is easy to become burdened with debt. People might make purchases without much thought to the eventual financial consequences, because the full amount does not need to be paid at the end of the month. In some cases, certain actions can make the debt problem even worse.

Paying Only the Minimum

    You may have noticed on your monthly credit card statement that the minimum amount is a small percentage of your outstanding balance, often about two percent. Credit card companies do this intentionally in an effort to keep you in debt for as long as possible. By paying only the minimum amount due each month, you may take years to pay the card off in full, even if the outstanding balance is relatively small. Paying even $10 or $20 more than the minimum each month can reduce your debt faster.

Teaser Rates

    Credit card companies sometimes offer attractive "teaser rates" to entice people to transfer other balances to their card. The new interest rate may be as low as zero percent in some cases. These rates only last for a short period of time, often six months to a year. After the introductory period, the cardholder then pays the "normal" interest rate, which may be much higher than the rate she had been paying on the previous card, further aggravating the debt situation.

Consolidation Loans

    Consumer finance companies offer consolidation loans that pay off existing debt like credit cards and allow the borrower to make one monthly payment. In some cases, these loans may include even higher interest rates than the credit cards. And while the monthly payment may be lower than the aggregate of the credit cards, this is usually because the payments are spread over an extended time period. As a result, the total interest paid by the borrower may also be greater.

Poor Saving Habits

    People who do not save money may need to rely on debt instruments like credit cards to meet unplanned expenses or emergencies. As debt continues to pile up, the opportunity to save money further diminishes as any spare funds. This can result in a vicious cycle where debt continues to spiral out of control while the chance to save money becomes virtually impossible.

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