A money management class would have been helpful in school. Having this class as part of an ongoing curriculum would have highlighted the importance of having good spending habits for students. Not only does knowing how to spend money wisely help with long term monetary goals, it can also prevent consumers from having a high amount of credit debt and bad credit.
Many consumers obtain their first credit card when they are in their late teens. This is a time when kids may participate in risky behavior and explore life's possibilities. They first get excited about being approved for a credit card, and secondly, actually being able to buy items they normally would not be able to afford.
They use their first charge card relentlessly and do not have second thoughts about what they need and why they need it. They just buy it. The last thing on their mind is accumulating credit debt.
Brain Development and Rational Reasoning
Researchers have discovered substantial evidence that supports one of the reasons why people end up with such high amounts of credit card debt. Consumers in their late teens have not had time to develop the necessary skills of logic that deal with rational reasoning. This specific way of thinking doesn't occur until later in life when the brain has had more time to mature.
In a study conducted by John Snow Health Care Institute titled, Adolescent Brain Development: The Importance of Parental Involvement, it was concluded that it is not until adolescents are in their twenties that they are capable of using complex thinking skills such as, "planning, reasoning, setting, priorities, organizing thoughts, suppressing impulses, and weighing the consequences of one's actions."
With this concept in mind, this can be one of the reasons why consumers tend to rack up charges on their credit card(s). Before they are aware of it they have accumulated an obscene amount of debt. This makes it nearly impossible for anyone to pay off this debt quickly. This inability to pay off debt quickly amounts to them having to pay compound interest.
What is the Actual Cost of Purchases When A Credit Card is Used?
Jeremy Vohwinkle (About.com Guide) in his article, The High Cost of Using Credit Cards: What the Credit Card Companies Don't Want You to Know, explains how credit card debt works. This article also provides valuable information about the hidden intentions of the credit card companies.
In this article, he shows a good example of what happens when a credit card holder has accumulated a credit debt of $2,000 and has chosen to pay only the minimum payment of $40 a month at 18% interest. This card holder ends up only paying $10 towards the initial purchase, the other $30 would go strictly to interest alone. Even worse, by only paying the minimum payment; the $2000 that was borrowed in the beginning could end up costing the person $7000 in the end!
Improve Spending Habits
The only way consumers can prevent credit debt from accumulating so quickly is to stop bad spending habits. Below are ways consumers can improve their spending habits and incorporate more productive money management techniques into their daily lives.
Three Easy Ways to Keep Credit Intact
- Get Rid Of Credit Applications- Shred all credit card applications that arrive via snail mail or online. By keeping those applications around consumers increase their chances of applying for another unnecessary credit account.
- Save Money, Pay With Cash- Saving a few dollars here and there, consumers can save money for when they need it most. Paying cash will prevent consumers from making new debt. Without creating new debt, old debt can be paid off quicker.
- Don't Increase Credit Limits- Sometimes when consumers have been making timely payments on their credit cards, credit card companies will increase their credit limits. Do not allow this to happen, simply contact them and tell them to lower the limit. Failing to do this makes it easier to add new debt, and impossible to pay off the old debt. Plus, this will increase a consumers chances for being a candidate for bad credit when the minimum monthly payments continue to go up and the consumer cannot pay them.
When consumers use these three techniques to improve their spending habits and pay off debt they will make progress towards being debt free. They will also change the irresponsible behavior learned over the years and replace those bad spending habits with good spending habits. All while on the path towards financial freedom.
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