Category Archives: Finance
According to http://www.creditcards.com, Americans owed a total of $2.8 trillion in consumer debt. The average American household has $15,799 in credit card debt and the average American household had $54,000 of debt from all sources (credit cards, auto loans, mortgages, etc.) So if you are in debt, you are certainly not alone.
Not all debt is bad. Most people have a desire to own their own home and require a mortgage to do so. But credit card debt is particularly damaging to your finances.Money that could be saved or invested is going to the credit card company. The debt remains long after the European vacation that created it. Debt is really the last form of legal slavery. Think about it. When you are in debt, a percent of your working time is actually going to pay the debt off. If you have $20,000 of credit card debt, and your annual salary is $60,000 a year, you will in effect be working for the bank for 4 months to pay it off and probably longer when the interest is added in.
So what should you do if you are heavily in debt?
Step 1 may seem obvious but should be stated nonetheless. If you are in the hole, stop digging! Take the cards out of your wallet and stop using them. Make only those purchases that you have the cash on hand to pay for.
Step 2 make a list of all your outstanding debts. If there are some credit cards on that list, call the companies and ask that they lower your interest rate. They might say no, but it never hurts to ask. Keep an eye out for offers of new credit cards with low introductory rates. Some cards even offer 0% interest for 1 year on any balance transfers. Just be sure to read the fine print and make sure the rate is not going to go up too dramatically after the first year. If this isn`t an option, look at your existing cards, and see if you would save money by transferring balances from a higher rate card to a lower rate one.
Step3: Go over your household budget. What can you cut back on, so you can pay down your debt? Some things to think about are those morning café lattes that cost $5 dollars each. Or maybe you can brown bag your lunch instead of eating in the company cafeteria. Be creative, stay focused on the goal of getting rid of that debt.
Step 4: After you have gotten the rate down on your debt as much as possible, prioritize them. Pay the minimum on the lower rate cards and pay the most you can afford on the highest rate card. Once the highest rate card is paid off, repeat with the highest rate card remaining.
Let’s look at an example. Assume, you have been making the minimum payments on your cards and after going over your budget, you found that you could pay an additional $500 a month towards your debt.
-Card A 17% $4,600 balance minimum payment $120.00
-Card B 19% $5,800 balance minimum payment $145.00
-Card C 22% $4,000 balance minimum payment $110.00
You would pay $610.00 a month on card C until its paid off. Now you`ve freed up $610.00 a month that you can apply to Card B along with the $145.00 you are already paying. So you would pay $755.00 per month until Card B is paid off. Finally you would apply that $755.00 to Card A, along with the $120.00 you have been paying. So you would pay a total of $875.00 per month until Card A is paid off.
Maybe you budget is tight and you can`t find $500.00 a month to use. That’s alright. If you can only do a $100.00 over the minimum, do that. The key is that once the first card is paid off, take what you have been paying on that card and apply it to the next one. You may be tempted to slow down, after the first card is paid off, but don’t do it! Stay focused on the goal of being debt free. You probably took some time racking up your debt. It’s going to take time to pay it off. But once that first card is paid off, this system has a snowballing affect as you make larger and larger payments on smaller and smaller balances.
Step 5: Finally, you are now debt free! Don’t stop there! This is where the fun starts. You can now begin to save and invest that money and instead of being in the red, be in the black. You can look at my two previous posts on wealth building to see how you can make that money grow. Thanks for reading and good luck as you set your focus on a debt free, less stressful life.