Every day, people are bombarded by messages from banks, consultants and private businesses promising to help reduce their debt. While these promises may sound attractive on the surface, many are indeed debt traps that can drag your credit rating down and add more debt to your financial burden. Other debt traps result from poor choices people make for themselves. Know how to avoid debt traps by being an informed consumer.
Low/No Interest Rate Credit Cards
Banks actively send solicitations by mail, e-mail, phone call and cell text message promising low or no interest when you open a new credit card account. If you have little or no debt, it might come in handy to have a low rate credit card for emergencies. If you already have credit card debt, however, these offers can be dangerous. These cards usually carry stiff penalties. The attractive initial offer becomes null and void with the first late payment or overage, leaving you with a very high interest rate that is difficult to reduce later.
The Balance Transfer Game
Many credit card offers entice you to transfer balances from your higher rate cards to a new lower rate one for a set period. This initial rate also disappears with your first late payment or overage. Some people are successful with the balance transfer game, keeping these cards paid up through the low interest period, then transferring the remaining balance to yet another low interest card later. However, if you aren't able to adhere to the restrictions, you could wind up in a bigger debt trap by accepting such an offer.
Upside-Down Car Notes
Many car dealerships offer tempting deals to help move new models off their lots while offering you a "top value" trade-in incentive. However, if you're still making payments on the car you have and are "upside down," owing more than it's worth, understand that the dealership will calculate the difference between what they offer you for your car and what you still owe on the car note. They'll then add that to the price tag of your new car, making you even more upside down than you were before.
Shopping the Sales on Credit
Shopping the clearance sales on anything from clothes to housewares is fun for the thrifty shopper. However, if you're using a credit card to shop the sales, unless you play to pay it off in a month, that top or the new towels you picked up for 75 percent off are now racking up 25 percent interest every month until you pay in full, turning that great sale into a big debt trap.
Contracting with a Consolidation Service
Some debt consolidation services promise to work with your creditors on your behalf to lower your interest rates and your monthly pay-out and, in turn, improve your credit rating. Many of these services, however, can change the terms of your plan if the creditors' terms change, while others may require sizeable set-up fees before allowing you to enter the program. Use caution when entering one of these programs as they can put you into further debt than you were before you started.
Payday Loans
Your bank account may be running short of funds between paydays, or you may have an emergency occur and you need quick money to tide you over until you get paid again. Companies offering "payday loans" prey on people who fall into this situation, charging what amounts to 200 to 400 percent interest on such loans. Even using this service one time can throw you into a debt trap from which it'll be hard to recover.
First Credit Cards for College Students
Many banks and other creditors craft special offers for college students. Banks encourage students to get off to a good start and to build their credit ratings by securing their first credit cards. These students don't have credit ratings established yet that enable them to qualify for special rates, so these first cards often have annual and initiation fees, sometimes as much as $200 or $300, charged as soon as the account is opened. This drastically reduces the available credit, putting the student in a debt trap from his first day as a credit card holder.
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