Are credit cards the death of free cashflow?
In the last few months we have received more than one call from folk that are distressed with the mountain of credit card debt they have created.
More and more folk are being trapped on the debt treadmill. The price of today’s lifestyle of spectacular consumption, supported only by an ever-growing high interest debt.
One of these folk was near the end of the road with regard their debt position and the most aggrieved of the several credit card providers was putting significant pressure in place in an attempt to gain redress. I thought it an interesting summary to rewrite the question and answer session engaged in.
What are my options to stop the debt being handed to an agency for collection?
To stop any default action, meeting all monthly payments, even whilst in communication is the only option. Payments must be made on or before due date. Communication must be 100% up front and honest, the tolerance levels of credit controllers evaporates if they can detect any mis-truths or subsequent failure to perform any arrangement agreed.
What does it do to my credit rating?
If a card company calls your debt, you do not repay in full or make arrangements to repay, the debt may be listed or on-sold to a collection agency. Then, any future financial credit check will detect the debt.
When they are handed a debt what do they do?
The steps to recovery are; Locate the debtor, arrange a repayment program and if unsatisfied with progress or non-adherence to arrangements, pursue bankruptcy.
Do they charge interest on the debt?
Interest will accrue on balance owing, until debt is repaid in full or the institution or agency may agree to crystallise the debt (interest accrual ceases) or may accept a reduced lump sum payment as full and final settlement.
What does insolvency mean?
Insolvency (normally associated with business) is the result of living beyond your means i.e. your expenditure is greater than your income leading to your liabilities being greater than your assets. While not generally unlawful, in your personal capacity, this situation may lead to bankruptcy.
Bankruptcy, while you maybe ‘discharged’ after three years, carries a negative life-long business, social and creditworthiness stigma and should be an extreme, last resort option.
To keep folk onside, as a minimum you must make payments at the 3.00% monthly level, even then, with no more debt and plain sailing, you are looking at almost three years to clear the card debt in most instances.
All cards must be fully repaid by due date to ensure debt problems don’t creep up. An excellent planning tool is to develop an emergency fund, say 90 days of household expenditure, invested in an easy access type of investment for unexpected events or costs that otherwise may just end up as expensive core debt.
Finally if you have more than one or two credit cards – cut them up.
Original Article published June 2005
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