A Resolution to Get Back on Track

Late January is often a time of grim realization for consumers. By that time, credit card statements have arrived and people are faced with the consequences of their holiday actions. What did Charlie Brown used to proclaim? "Arghhhhhhhhhhhhh."

The ratio of debt to disposable income for American households is at a record level, according to research by the Federal Reserve. And the number of personal bankruptcies hit a historic high in the third quarter of last year. Credit card balances have shaped each of those statistics.

Why, with all of the statistics and warnings, do people continue to carry such frighteningly high balances on their credit cards? First, credit is painless to use, so people have the tendency to buy more when they use their credit cards than when they pay cash. Secondly, according to Federal banking regulators who tightened lending standards for all credit card companies earlier this year, credit card companies have made it too easy for borrowers to accumulate debt and too hard for them to pay off their balances.

The bank examiners criticized credit-issuing companies for setting minimum payment requirements so low that they did not cover the monthly finance charges and fees. This process, known as negative amortization, means the balance goes up instead of down. And the cycle perpetuates.

If you find yourself overwhelmed by debt, take action. You don't need to cut up your credit cards if you've overspent — in fact, that could hurt your credit rating and cost you money in the long run. But you should focus on keeping your spending in line.

Of course the best approach is to pay off your credit card balance every month. If you must carry a balance, keep it to one card with a low rate. Spreading purchases on several cards makes it easier to overspend and accumulate more debt.

If you can't pay off your debts right away, compare your minimum monthly credit card payments to your discretionary income — what's left after you pay the mortgage, car payment and other required monthly bills. If your discretionary income is higher than your minimum payments, use the extra cash to begin paying off the debts. Do you have money sitting in a savings account? If so, tap into it. Earning single-digit interest on your savings while paying double-digit interest on your debts is not wise.

If the total of your minimum payments is more than your available funds, look for ways to cut your spending. Take some time to review your household budget. How much money comes in each month and where does it go? Most families can trim at least some minor expenses and apply the money to credit card debt. Consider cutting back on such things as dry cleaning, car washes, and eating out. You don't have to cut out all of the luxuries in life — but you just might be surprised by the monthly tally for such things. If you haven't shopped for auto insurance, homeowners insurance or long-distance phone service in a while, you might consider it.

Never go over your credit limits and never pay your bills late. If you do, you'll get hit with penalty fees. It hurts your credit rating, which gives lenders reason to up the interest rates on your debts, putting you even further behind.

If you have debt, make a few sacrifices now. Otherwise, it's hard to get out from under it. And the cycle perpetuates.

Contact your Johnson Bank personal banker for more information on reaching your savings goals.

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