10 ways to avoid creeping credit card debt - My29 WFTC Minneapolis-St. Paul

By Andrew Housser

Over the past decades, U.S. revolving household debt – debt from sources such as credit cards – has gone up and up. Through the 1960s, revolving debt was so unusual that the government did not track it. In 1968, the first year it was tracked, revolving household debt for all U.S. households was $1.3 billion. Today, it's almost $800 billion, and the average household that carries revolving debt owes about $15,000.

The good news? The total U.S. revolving household debt is actually down 17 percent from the all-time high of $973 trillion in fall 2008, just before the Great Recession started.

Yet a new danger arises as people get out of debt. Some people find they have worked hard to get out of debt – or dramatically lower it – only to find themselves back in debt a few years later. How does debt sneak back up on people, and what can you do to keep it at bay? Here are some suggestions to stay out of debt once you get there: 

1. Budget, budget, budget. Calculate what comes in and what goes out of your budget. Then find a way to live within your means, without plastic. Some people succeed by breaking their monthly income into weekly increments. That way, if you overspend one week, you have the next week to recover. Others switch to cash only. Removing credit cards from your wallet (and from near your computer) can help make it impossible to overspend on credit.
   
   
2. Don't use rewards as an excuse to go into debt. A study last year by the Federal Reserve Bank of Chicago found that when people sign up for a credit card that offers rewards, their spending and their debt increase. In fact, their debt usually goes up faster than their spending. The reason? Their payments don't go up, even when they spend more. The solution: Do not let rewards motivate you to charge more credit card debt. If you do not pay off the debt each month, the interest you pay will likely cost more than what you earn in rewards – potentially a lot more.
   
   
3. Borrowing money isn't getting out of debt. What is debt? Borrowed money, of course. But some people think a good way to get out of debt is to borrow more. For instance, they might take out a personal loan or a home equity loan to pay off credit card bills. The problem? All too often, they start charging to their credit cards again, while also having to pay off the old debt.
   
   
4. Understand the root of the situation. It is important to understand why you got into debt so you can avoid making the same mistake again. Is it because you cannot afford the basics of life? Because you eat out or travel too much? Because you shop when you are bored? Because you are "keeping up with the Joneses"? Try to analyze the reasons for your debt so you can change your habits.
   
   
5. Do not overspend "just this once." It can be a huge relief to pay off debt. Many times, people celebrate their new freedom from debt by making the purchases they have been putting off – on credit. Unfortunately, Murphy's Law dictates that no sooner do you charge some expenses than you lose a job, require surgery or run into a major car repair. Suddenly, that big purchase is racking up interest while you make minimum payments. Stay strict with yourself. Instead of charging, save up for your purchases instead of buying them now with debt. When you have enough for the big buy, reward yourself with a clear conscience.
   
   
6. Keep yourself "poor." If you can manage money well when you have little, but spend too much when you have more spare cash, try playing mind games. One way to successfully resist overspending is to use some of the same money management methods you did while in debt. So, after paying off all debt, set up automatic savings transfers in the same amount you were paying on debts. Instead of paying creditors, you'll be paying yourself and watching savings add up.
   
   
7. Make smart choices about "musts." After paying off debt, you might need to make a purchase such as a car. Just be sure the payment is within your means. Otherwise, you might find yourself scrimping (or charging) to meet other needs.
   
   
8. Rebuild credit the smart way. If you destroyed your credit score with too much debt, you do need to rebuild your credit. But do it the right way. Charging indiscriminately on a credit card to build a track record can spell trouble. Instead, charge small amounts and pay them off every month. One good strategy is to use a credit card to automatically pay a regular bill. That way, you are not adding costs to your budget. Instead, you are simply using a different method to pay them while building up your credit history at the same time.
   
   
9. Bankruptcy is no cure-all. Some people take a drastic measure like filing for bankruptcy protection – and then as soon as they can accumulate new debt, find themselves in over their heads again. Bankruptcy will not change your habits without hard work on your part. Remember, people who have recently filed bankruptcy cannot file again for a set number of years.  Going too deep into debt could result in having liens placed on bank accounts or a home. That situation can lead to serious problems.
10. Get help if you need it. If you cannot pay bills because you have lost your job or faced other unusual circumstances, be honest with the credit card banks. Sometimes they will give you a break on payments for a few months while you get back on your feet. Meanwhile, of course, avoid using your credit cards for expenses. In a very difficult situation, seek help from a credit advocate or debt resolution company.

Paying off debt is no easy task. Staying out of debt can be even tougher. But once you create new habits, you will find the satisfaction that comes from building financial security.