January 8, 2011
Risk Management Case Study: Averting Credit Card Debt
Credit card debt is a huge burden for millions of Americans today. It is estimated the average household credit card debt in the United States is over ten thousand dollars. There are few things that cause more grief and anxiety that owing more money than you have. By using some simple techniques of risk management, taken from business, you can easily avoid going into credit card debt. If you’d like to stay out of debt and keep your head above water financially, then this article is for you.
The first step is to determine all of the possible negative outcomes. In the case of credit card debt, this determination comes at the buying point. The decision to purchase is point at which the risks are present, and you can make a conscious decision based on a number of factors. How you consistently decide at this point will have a dramatic impact on your financial health.
In the case of buying something on credit, what is the worst possible thing that can happen? For many people, it’s buying the item, then receiving the bill a few weeks later, only to find there isn’t enough money to pay it off. So you make the minimum payment. The same thing happens month after month. Eventually you wind up paying three or four times the original price of the item.
The next step is to determine how likely this is to happen. What are the odds of you paying only the minimum amount on your next credit card bill? The best way to determine this is to look back over your previous payments. Where they for the amount in full, or only the minimum. This is a good indication of your ability to pay next time.
Now you’ve determined the probability of the worst possible outcome, you need to do something to keep it from happening. Obviously, the easiest decision is to not buy what you want to buy. This can be very difficult. One trick is to put off buying it for a day or two, and see if you still want or need it. Another possibility is to try and pay in cash. If neither of these options are available, then it’s time for the next step.
The final step is to prepare yourself to accept the worst possible scenario. In this case, that is not paying your bill off in full, and making the minimum payment for several months. This means the actual price you’ll pay for the item is several times what the price tag says. So multiply the price tag by at least four, and ask yourself it’s still worth it. If it is, then go ahead and purchase it, and prepare to be paying for it for several months. If you decide it isn’t worth it, then you’ve made a wise decision using risk management, and have saved a significant amount of money.
With operational risk management software you can dramatically minimize your risks, and maximize your profits. So head on over to the operational risk management software page today.
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