During this season of ghosts, goblins and witches, I would like to discuss another type of creep. Credit Creep. One version of credit creep goes like this. Accumulate $25,000 to $35,000 of credit card debt caused by buying stuff on your credit card that you cannot afford to pay. No problem you say. I will go to my friendly lender and borrow the total of my credit card balances in the form of a debt consolidation loan. This makes sense because the interest rate on a debt consolidation loan is less than credit card interest. The payment on a debt consolidation loan does not revolve like a credit card. It is fixed allowing for better budgeting. Smart! This would be smart if you payed the balance on your high interest credit cards and stopped using the cards. Many Americans do not stop using their credit cards. They pay off the high balances with the loan consolidation and continue to spend more money than they earn. This results in what I call Credit Creep. After you pay off the credit card balance, Credit Creep begins with the continued use of the paid off credit card beyond what you can afford to pay at the end of the month. The result is the same as before. Unpaid credit card balance. Now you have a large unsecured loan payment in addition to payments to maintain your new advancing credit card balance.
Do you see the creepiness here?
Stop using your credit card. Redesign your personal budget so you spend less than you earn. A budget is essential. It would be better to attack your credit card debt with any savings you possess. Few investments earn a 17% return or the average interest rate Americans pay on credit card debt. Use the money you save each month by reducing expenses and pay down the credit card. It may take 3 years to accomplish. Find a side hustle to make extra money and use the additional income to pay of the credit card debt.
If you decide that the consolidation loan solution is best, remember to put your credit cards on ice to stave off the creep. Literally put your credit cards in a sandwich bag. Fill the bag with water. Place assembly into your freezer. This puts your credit cards on ice! This will help you get out of the habit of using your card to pay for your every whim. Cutting your cards may be advisable. When you have paid off your balance, call the card company to send you a new card.
These methods eliminate taking a credit score hit because you closed the account. If you are irresponsible with credit cards, cancellation may be the best alternative.
Living debt free is worth the hassle! Be WalletWise.