Now that we’ve covered a little bit about managing and choosing a credit card, it’s time to get gory and switch over to the horror stories for a while. It’s a little bit like those high school drivers ed classes where they show videos of the worst possible car wrecks hoping to make you a little bit more cautious when you drive. I hope by now you know I don’t think credit cards are a bad thing.  They really are a useful tool and if you think about the way you use them, they can really help out. Just suppose though you, or maybe someone you know, makes some mistakes and gets into too much debt.  How can you tell when you’re in too deep and what are the consequences? Well, the good news is that, unlike those drivers ed videos, where the accident happens pretty instantly and the consequences can be fatal, a credit card crash takes a little while to build. But like a car crash, the consequences can be long-term and damaging, however, you shouldn’t end up dead.

So what are the signs that someone is heading into credit trouble? Well, here’s an easy rule that is often used:  if you are regularly using more than 20% of your income to repay credit card debt, you are potentially heading for a crash. Now, that isn’t always the case.  Some people get to that point and can avert a crash.  But if someone is at that point, they should really be taking a hard look at their situation and taking some immediate steps to pay down the debt.

Jennifer put together the following list of indicators, based on information from the National Foundation for Consumer Credit, that can be used to judge if you are in financial trouble:

• If you are unsure about how much you owe

• If you skip some bills to pay others

• If you use credit instead of savings to meet emergencies

• If you lost your job, you would have trouble repaying the debt you currently carry

• If you have postponed medical or dental appointments in order to make credit payments

• If you find that you and your spouse/partner argue about how credit is used

• If you receive calls from creditors about overdue bills

• If you buy necessities, such as groceries and gas, on credit because you don’t have any money

• If you are using an increasing percentage of your monthly income to pay off debts

• If you can only make minimum payments on your credit cards

OK, so now we have an idea of how we can see the crash coming.  Lets get an idea of some of the consequences of that crash. Well, here you have both immediate and long-term consequences. Immediately a credit crash is going to radically alter your way of life. Whether the crash is major or minor you will have to alter your spending habits. In a minor crash, you will have to cut back and focus on paying off your debt as the number one priority. In a major crash, you may have to sell off assets, maybe, your car, furniture, jewelry or anything you own. A major crash could even go as far as bankruptcy, where you effectively become blacklisted in the financial world for many years into the future.  But that’s moving over to the long-term consequences.

Even minor crashes, the fender benders of the financial world, can have long-term consequences. Just missing the odd credit card payment is putting dents in the side of your credit history. A history that is going to pop up every time you apply for credit, try to lease a place to live, and even apply for a job. It’s also a lot harder to remove a dent from your credit history than it is from you car, well, harder may not be the right word, it is actually pretty easy . . . you just have to wait SEVEN YEARS.

Now a major crash, where you just spin out of control and end up in a mangled heap on the side of the road, will do the same to your credit history.  It will leave you untouchable to many lenders and facing incredibly high rates of interest from any lender that is still willing to give you credit. If the crash leads to bankruptcy, then the results will stay in your credit record for ten years and you may have considerable difficulties ever rebuilding your credit worthiness.

What’s more, you can be penalized for what the credit industry views as dangerous driving.  Remember the friends I had back in college who had the competition to collect as many credit cards as possible?  Well guess what, even the guys that didn’t use the cards were damaging their credit score.  A credit score is a figure used to represent your credit worthiness -- the closer to 800, the better.  It takes into account a number of factors including your income, educational level and credit history. This score is used as the basis for many credit decisions and, besides the factors I just mentioned, it calculates in numerous other variables. One of the variables is the number of credit cards you have and the total possible amount of debt you could have on those cards.  So, if you had ten cards each with a credit limit of $1,000 dollars, you could at any time be carrying $10,000 in debt. Whether you are or not isn’t the point.  The risk is there that one day you might decide to go on a $10,000 spending spree.  So the credit score takes this risk into account. That means that my friends who didn’t even use the cards were still damaging their credit score just by holding the cards because the cards represented a risk. The only way they could reduce that risk was to actually cancel the cards they weren’t using.  Just not using them wasn’t enough.

If you think you are heading for a crash what should you do? Skipping the country isn’t really an option.  First, because immigration rules all over the world are a real pain in the neck, probably worse than dealing with your creditors and, second, because the credit card companies are worldwide.  So the chances are, if you mess up your credit here, you will mess up your credit everywhere.  With running ruled out as an option, you need to deal with the situation. Now, there are a number of things you can do.  This is a situation that plenty of people find themselves in, all different kinds of people, people just like you and me, so don’t think that your situation is unique.  There is help out there. However,  before you seek help, there are things that you can do for yourself.

1. The first is to sit down and write out a list of all your debts, include the amount currently owed, who it is owed to and the contact details for that debt.
   
   
2. Next formulate a plan.  Look at how much you owe, how much your living expenses are and how much income you have. Once you have done this, plan a realistic schedule for paying down the debts.  Most important of all, make an absolute commitment not to take on any additional debt.
   
   
3. If the plan you came up with requires assistance from the creditors, like reduced monthly payments, then you need to contact the creditor. Tell them exactly what your challenge is and how you plan to resolve it.
   
   
4. Often it is difficult to make arrangements with all the creditors that you have. If you are having difficulty working with your creditors or even developing a plan, contact a non-profit credit counseling agency, such as a member agency of the National Foundation for Consumer Credit (NFCC). These agencies offer free or very low cost financial counseling. They work with you and your creditors to develop a repayment schedule.  They can often negotiate lower interest rates from your creditors for you.
   
   
5. If none of the above works, you may want to consider bankruptcy. It is important to understand exactly what bankruptcy is and what it will mean for your future. Because of the many long-term consequences that will result, bankruptcy should be considered only as a last resort.

Now, the chances are that this isn’t going to happen to you.  Odds are, you’ll be a good credit card user and build a good credit history.  But remember, even if you are cautious, unexpected things can still happen. Probably the most risky period for you will be after you graduate, when you may be faced with paying off credit card debt and student loan debt at the same time.  To make that day easier, minimize your credit card use, develop financial goals, and plan your spending.

Click here for an information sheet on credit and credit management

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