Signs You Could Be Heading for Trouble
- Depending on credit to pay for the basics like food and utilities.
- Responding to offers to transfer balances from one card to another.
- Increasing your credit limits.
- Leaving no cushion in your financial life for even a small or unplanned expenditure.
- Making only minimum monthly payments.
- Ignoring credit card statements (or other bills).
- Maxing out all of your credit cards.
Fixing the Problem
First and foremost: GET HELP. You don’t have to face this alone. It’s easy to lose control of your spending, but there are ways to regain control. Gaining control involves taking deliberate and positive steps.
The first step is to take a realistic assessment of your budget. If you haven’t set up a budget, now is the time to begin. See the Budget Worksheet for Students or the Budget Worksheet for Residents to get started. You can also track your spending and create a budget by using the AAMC’s Financial Wellness program. Knowing what money is coming in (income) and what money is going out (expenses) is critical when determining steps to fix the problem.
Consider using the credit card with the most favorable terms and limit the number of credit cards you have -- too many open lines of credit may have a negative impact on your credit score. See Credit 101 fact sheet for more details.
Contact your creditors if you're having difficulty making your monthly payments. Try to work out a modified payment plan that reduces your monthly payment to a manageable amount. Creditors would like to work with you to help you pay off your loans and repair your credit rather than have you default on your credit obligations.
Consider Other Options
Talk to the financial aid administrator at your school. They may have worked with students in similar situations and may be able to provide helpful guidance or financial assistance. If your situation is more complicated, and you can't work out a modified payment plan with your creditors, or if you aren't disciplined enough to create a budget, consider contacting a credit counseling organization. The United States Department of Justice provides information for consumers as well as a list of Approved Credit Counseling Agencies.
Credit Card Rules
While you are taking positive steps to get out from under your credit card debt, pay attention to the rules that are designed to provide protection to consumers. Become a knowledgeable consumer and know your rights. If a credit card company acts unfairly or deceptively, a complaint can be submitted to the Consumer Financial Protection Bureau.
The Minimum Payment Trap
Credit cards may require that you make a minimum monthly payment of 1 to 3 percent of the balance owed. While this may make payments manageable on a tight budget, it will also cost you more money in the long run. For example, if you have a credit card balance of $5,000 with an interest rate of 17% and you only make the minimum monthly payment, it will take over 15 years till the balance is repaid, and you will pay over $4,000 in interest alone. Think twice before making only the minimum monthly payment!