One of those things that can surprise you when you least expect it is credit card debt.
It’s behind that balance transfer credit card begging you to use it for new purchases. He hangs out in the dark alleys and tells you to take a vacation you can’t afford to earn a signup bonus. Otherwise, you will lose free money!
I have thought about the debt a lot because, according to the Federal Reserve, revolving debt (including credit cards) rose 1.5% in July. This means that consumer revolving debt now stands at $ 1.037 trillion.
You can avoid being part of this trend by recognizing the situations that can lead you down the road to debt. Let’s take a look at four ways debt can surprise you.
You enjoy your credit card rewards program without reading the fine print
It’s so easy to be lulled into a fantasy land when you feel the urge for the beach and the sound of the ocean. There is nothing wrong with using your rewards card if you have the money to pay off the balance when you get home.
But there are some rewards programs that don’t look like debt traps. For example, American Express offers a Fly Now, Earn Later program. You can take the trip of your dreams even if you haven’t accumulated the miles to pay for the ticket.
OK, you’re basically buying a note on credit that you have to pay off within the next six months. For savvy consumers, this might not be a problem. You know you’ll spend enough on the card to earn miles before it’s time to foot the bill.
But what if things don’t turn out like this? If you haven’t earned miles within six months, you’ll be charged 2.5 cents per mile. At, say, 10,000 miles less, it’s $ 250. The annual percentage of these fees will be the same as your purchase APR.
If you can do it without wasting a dime, then more power is for you. But I don’t think it’s a good idea to take a trip now and pay for it later. You just don’t know what will happen by then.
If it’s an emergency, like a death in the family, and you can’t afford the ticket today, that’s an acceptable reason. And even then, when you get home, focus on getting those miles back within six months.
The next one is also related to travel, but involves installment payments.
You decide to make payments (with interest) on a trip you take later
In the same vein as # 1, there are websites that will happily take your money to fund your trip. For example, Flightlayaway.com allows you to use a credit card to pay for a ticket by making installment payments at 15% interest. And there’s a 15 percent reservation fee, too.
There are many more, including UpLift, which partners with some major airlines, including American, JetBlue, and United.
The site indicates that APRs are as low as 9.01 percent. If you have credit problems, you will get a much higher rate than that. Keep in mind that interest starts accruing as soon as the loan is issued. Oh, there is an origination fee as well.
If you are using your credit card to make the installment payments, you are using the credit to pay off the credit. Remember that you must reimburse the credit card issuer for the monthly payment amount. And if something does happen and you can’t pay the bill in full during the grace period, you need to manage the interest on your balance as well.
This approach is complicated and more expensive than necessary. Why not just put those funds into a special vacation account with your bank or a high yield online savings account? If you’re determined to use credit, use a credit card that offers zero percent APR on purchases for 12 to 18 months.
You don’t know the universal fault still exists
Many consumers believed that this practice had been eliminated by the Credit Card Accountability Responsibility and Disclosure Act of 2009. The CARD Act imposed certain limits on universal default, but this can still happen in specific circumstances.
Universal default, in general, means that a business can change the terms of your credit card if you’re late on a payment. This may include applying the default APR or reducing your credit limit.
Neither is good for your credit rating or for your wallet, but the scary thing is that your new 29.99% APR can be applied to your outstanding balance.
If you are more than 60 days late on a payment, the issuer can legally apply the penalty rate to all your balance. There is a provision that requires the issuer to adjust your APR after you have made six payments on time. Don’t expect your card issuer to follow this and automatically lower your APR. Stay on top and make sure it happens.
You decide to get a payday loan one time only to get caught up
If you still have good credit and your solution is to move the debt to a balance transfer credit card with a zero percent introductory APR, it’s a reasonable decision. Well, with a caveat: you should never use your new balance transfer card for new purchases. If you add to your already inflated balance, you will take on more debt.
The same advice goes for debt consolidation loans. You have to stick to the plan, which is to get out of debt while saving on interest.
Do you know what can happen just when you think you’re in control? You get a little too relaxed with the expenses. You tell yourself that you can put a new HDTV on your balance transfer card because the card also offers a zero percent purchase APR.
Before you know it, you’re having trouble making the minimum monthly payments. As the debt increases and the introductory rate ends, you start to struggle to cover your daily expenses.
This is when payday loans look attractive. You can get a short term – but high cost – loan of $ 500. You might think you’ll only do this once just to get back on track. But getting that first payday loan is a sure-fire way to dig yourself even deeper.
According to Consumer Financial Protection Bureau80% of payday loans are renewed or followed by another loan within 14 days. The due date for paying off the loan is usually only a few weeks away, so it’s easy to fall into the “just one more time” trap.
A typical two-week payday loan has an APR of nearly 400%, according to the CFPB. For example, a typical loan has a charge of $ 15 for every $ 100 borrowed. Getting a payday loan can be one of the worst financial decisions you can make.
If things are going so badly that these terms sound okay to you, consider asking for help. You can find an accredited credit counseling agency through the National Foundation for Credit Counseling. You will receive a free phone session, in most cases, to help you learn about your options.