UBAI3013 E-COMMERCE
Bachelor of Business Administration (HONS)Entrepreneurship

Tutorial Group 1
Lecturer: Ms. Kang Chye Mei
Tutor: Ms. Chin Wai Yin

Monday, June 29, 2009

Credit Card Debts: Causes and Prevention


What is credit card?

According to Wikipedia, credit card is a part of system of payments named after the small plastic card issue to users of the system. It’s a card with a small chip on it and entitles cardholders to use it to make purchase at merchants accepting that card. Credit card holder need not pay all the balance which they had used at the end of each month. What they need to do is only pay a defined minimum proportion of the bill by the due date, or maybe a higher amount to be paid. There are interests on those not fully paid credit card bills.


It is easy to spend extra money without paying much back to the credit card company, who is why many people, goes to credit card service and leave themselves with debts. Debt accumulates and increases via interest and penalties. When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default. Additional on high annual percentage rates (APRs), consumers declare bankruptcy.


There is NO positive side on credit card use. Credit card debt is the major problem is America. Well, back to few months ago with the rise of universal economic issue, which nearly causes Malaysia repeating the economic crisis on 1997/98. That economic issue does brought a huge effect to whole world economic, including Malaysia. The major causes of the economic this time was due to the serious credit card debt in America. Fortunately it only affect partially on Malaysia’s economic.


Causes of Credit Card Debts

Credit card can be the start of a years-long-nightmare and unbelievable stress if abused. There are many causes to the constantly increasing credit card debt. It can be list down as follow.

a) Less income, more expenses

The situation of losing their own job or facing reduction of their salaries, on the same time the monthly expenses still goes on to survive. This leads to the rise of debt. The family or the man is forced to use their credit card for groceries, utilities and etc.

c) Poor Money Management

Poor money management is one of the top reasons why there are mountains of credit card debtors. They did not keep track on which item that are sure and useful to buy but keep spending a lot on useless, yet they do not realize it. While the money is going towards on those expenses through credit card, they still have to be charging on interest and service charge every month. While no saving or just save a little sum of money inside bank account also under poor money management.

Sometimes, they are also people who having poor money management are financial ignorance. They do not care how much are they suppose to spend with or save some for any happenings that might incur in future. For example, financial crisis that might be happen all in a sudden.

d) Underemployment

If you are underemployed meaning you are not getting enough working hours at your job, not getting enough living fees to spend over your lifestyle. This means, you have to cut down on that lifestyle to match on your current income. Most of them are unable to do so. Yet, they spend much; play much but less salaries and fewer saving.

e) Big medical expenses

On the other hand, this reason might be an unavoidable reason to those people who gets sick. No one wish to get ill. It might cause huge expenses because nowadays medical expenses are very expensive to spend. All most every doctors and hospital accept credit cards, so they use credit card in advance to pay for the huge expenses of medical fees, and intend to pay it back in the future. Since not everyone are affording to pay such big amount of medical fees on the scene. It is too huge amount and it causes heavy debt.

f) Divorce

Divorce, fees for the divorce attorney, division of assets between you and your spouse, proceed given to children and etc also leads people to rack up a huge debt. Divorce might force them to quit working and leads to reduction of income or their salaries they having unable to support such a huge debt once in a short time. In short, this reason causes another debt problem again.


Prevention of Credit Card Debts

But as with many things in life, when it comes to credit card debt, prevention really is better than cure.

a) Manage your finance

First of all, one has to determining on their monthly income and needed expenses. To prevent from debt, one must know how to control on which are to spend and which are not. Of course, having a proper amount of savings inside ones own saving account to prevent on any kind of incident happening that might made one to use that money to solve problem temporary rather than rack on credit card debts. A well plan saving plans is crucial when facing money problem. Moreover, people are advice to use credit card as cash, not as credit card.

b) Debit card

One of the best practice to prevent from rack on heavy credit card debts is stop using credit card, but go to have a direct setup on debit card that acquire one to payback the full amount each month. Or in other option, one may shop themselves with the right card only, convenience of using it in emergencies. Know the fine point of the certain credit card you own. Knowing the kind of interest rate might be charged. If you’re not up to date on your interest rate, you might end up paying more in interest than you have to. Do not over use it but use wisely.

c) Pay back full balance

Debtors are requiring paying back full balance at the end of each month. Pay it on time if you do not want to have any kinds of extra charge. Never make late payment including car or house payment. Prevent yourself from debt!

d) Early education

The best method of prevention is to teach our youngest generation all about money before they even qualify for a credit card. The earlier children learn how to manage finances the less likely they will be to fall into credit card and debt problems as an adult.


Sources:

http://en.wikipedia.org/wiki/Credit_card_debt

F:\Top 10 Causes of Debt.mht

http://www.cardratings.com/howtoavoidcreditcarddebt.html

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