Credit Card Debt Puzzle: Liquid Assets to Pay Bills (2024)

FAQs

What is the credit card debt puzzle? ›

By Claire Greene and Joanna Stavins. Full Text Document (pdf) The scenario in which consumers revolve unpaid credit card debt while maintaining some liquid assets, typically as a balance in their bank accounts, is known as the credit card debt puzzle.

While your credit can increase your liquidity, it is not a liquid asset. Liquid assets are just that: assets. They're worth something and can be sold if you ever need cash for another purpose. A credit card doesn't have intrinsic value.

Defining a Debt Trap

A debt trap is when you spend more than you earn and borrow against your credit to facilitate that spending.

You make one payment 15 days before your statement is due and another payment three days before the due date. By doing this, you can lower your overall credit utilization ratio, which can raise your credit score. Keeping a good credit score is important if you want to apply for new credit cards.

Even if your other debts — like student loan debt and personal debt — are smaller than your credit card debt, Kiyosaki suggests paying off your credit card debt first. Your credit cards will typically have much higher interest rates than your student loans, personal loans and mortgage.

Examples of liquid assets may include cash, cash equivalents, money market accounts, marketable securities, short-term bonds, or accounts receivable.

For a working employee, a 401(k) does not qualify as a liquid asset, since its purpose is to accumulate retirement savings. If you are younger than 59 ½, you will owe a 10% penalty on the amount you withdraw. The penalty imposed on premature 401(k) withdrawals makes a 401(k) a non-liquid asset.

What is the best way to wipe out credit card debt? ›

Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.

Here's how most people get trapped in credit card debt: You use your card for a purchase you can't afford or want to defer payment, and then you make only the minimum payment that month.

Credit card companies rarely forgive your entire debt. But you might be able to settle the debt for less and get a portion forgiven. Most credit card companies won't provide forgiveness for all of your credit card debt. But they will occasionally accept a smaller amount to settle the balance due and forgive the rest.

Debt stress syndrome is the name that doctors have given to a condition where concerns over debt lead to mental, emotional and even physical health problems.

The Credit CARD Act of 2009 was intended to prevent practices in the credit card industry that lawmakers viewed as deceptive and abusive. Among other changes, the Act restricted issuers' account closure policies, eliminated certain fees, and made it more difficult for issuers to change terms on credit card plans.

While it's highly unlikely that any credit card company will forgive 100% of your debt without it being part of a bankruptcy, you may be able to negotiate a settlement with your lenders in which they forgive a percentage of the balance you owe.

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