Free Yourself From Credit Card Debt
Now that Halloween has ended, for many Americans it is time to start thinking about Christmas gifts. Yes, it is the season of eggnog and credit cards—that is, a sip of eggnog here, and one more holiday gift there. Soon, stomachs are filled with Christmas grog—and so are the credit cards.
Millions of Americans hocked their financial future last shopping season. And millions more will do it again this year. You don’t have to be one of those people.
If you have credit card debt, getting out and staying out of it is imperative for your financial well-being.
It is time to take action. With the economy stagnating, the housing market souring again, and the latest unemployment report showing stalled conditions, now is the time to take concrete steps to put your financial house in order and keep it that way.
You can be debt-free! Start today and don’t wait for the bills to arrive.
1. Create a budget.
Most people who have financial problems don’t have a financial plan. If you want to get out of debt and stay out of debt, the first thing you need to do is understand your financial condition. Start by listing all your expenses on a monthly basis. Be thorough and accurate. The point is to find out how much you need to spend. Next, total your sources of income.
There is a simple rule to follow: If your outflow exceeds your income, then your upkeep will be your downfall. In other words, if your balance sheet doesn’t add up, reduce your standard of living—or eventually you will go broke. Focus on keeping the “needs” and cutting the “wants.”
And when the budget is done, if you don’t have the money, don’t spend what you don’t have. It might be humbling for you, but your friends, spouse and children will appreciate it in the long run.
One way to keep from overspending is to place cash into envelopes and label them for each category of monthly spending. Every time you go grocery shopping, take the “grocery” envelope with you and keep track of how much remains in the envelope. When the envelope is empty, that is it—no “borrowing” from other envelopes.
2. Go to cash.
Credit card companies don’t give you cards out of the goodness of their hearts. They are there to make money. Every time you make a transaction, the credit card company gets a kickback from the merchant. Plus there are all the fees, penalties and interest.
Free yourself from the credit system.
And don’t get distracted by points or rewards. They are red herrings. Studies have shown that credit card users spend 15 to 18 percent more than people who strictly pay cash. There is a pain associated with paying cash that isn’t as intense when you just swipe a card.
If you can’t control your cards, cut them up. Be free.
Find out how much you owe on each card and what interest rate you are paying. Go online or call your credit card companies to get a current tally of your bills and the annual rate you are being charged.
In most cases, it makes sense to pay off the card with the highest interest rate first. If you are making minimum payments on multiple cards, do not stop paying one card to focus on the others. Make the minimum payments on all cards, but use additional funds to pay off the higher-rate cards.
Another strategy is finance guru Dave Ramsey’s “snow ball” approach. Start by paying off the smallest debt first—to gain momentum. Then use the extra money you gain from paying off that debt, to put toward paying off your next-smallest debt. And so on, until you are debt-free.
4. Pay more than the minimum.
That means paying more than just the minimum. For example, if you are 20 years old and owe $5,000 on a credit card that has an interest rate of 18 percent and you just pay the minimum of 4 percent each month, you will be 32 years old before you have dug your way out of that hole. By the time you are finished, you will have wasted almost $3,000 in interest—and that is if you don’t add any additional debt to the card, miss any payments or get hit with any other fees.
If your credit card charges 30 percent interest, as many cards do, it would take you almost 20 years to pay it off, and you will pay more than $8,000 in interest.
Think of all the extra money you will have after paying all those bills—or better yet, money you will save by not getting into debt again in the future.
5. Transfer high-interest debt onto lower-interest credit cards.
If you are paying 20 percent on one card, but you can transfer it to a card that only charges 11 percent, do so. It will save you thousands over the length of the loan.
However, be careful: Many cards have penalties and fees associated with balance transfers. Some cards also have low teaser interest rates to entice borrowers. With that in mind, make sure you talk to the credit card company and read all the fine print before transferring balances between cards.
Also make sure to pay attention to the interest rate on each monthly statement. Credit card companies are allowed to change the rate of interest at any time, regardless of payment history. If you miss a payment on one card, it can affect all your cards.
Some people with credit card debt may also choose to borrow against their homes at lower interest rates to pay off high-rate cards. This should almost never be done. It puts your home on the hook as collateral. If you don’t pay a credit card bill, no one is going to come and kick you out of your house. But if you use a home equity line of credit to pay off the cards and then get in more trouble, you and your family could be out on the street.
6. Seek advice, but be aware of “debt negotiation” schemes.
If you have extreme credit card problems, you may need to seek professional advice. But be very choosy about who you turn to because your credit rating is on the line. Some organizations have been accused of claiming to help debtors while doing little but charging fees.
However, a non-profit debt-help organization can provide much-needed expert counsel.
7. If you are unable to make a payment, let your card company know right away.
There is a good chance it will be able to work with you by taking a partial payment or deferring your payments, especially if you have a good payment history. Also, some cards come with built-in insurance against job loss or other events.
So get to work.
Start by returning any unused and unneeded recent purchases. And then as Dave Ramsey says: Sell so many things that the kids think they are next.
Remember, the underlying problem is a spending problem. Make a plan and get control of your budget, then the rest will begin to fall into place.
Credit card debt is surmountable. It takes hard work and determination, but now is the time to do it. Your financial future and your peace of mind depend on it.