Credit Card Debt
Per www.valuepenguin.com, the average amount of credit card debt is $6,270 with most interest rates ranging from 15-29%. Yikes. How do you like them apples???? Not at all, I’d say.
Do not carry a balance on your credit cards. This seems obvious, but the majority of us use our credit cards to make purchases that our beyond our means. If you can’t afford to pay the balance at the end of the month, don’t buy it. It seems so much easier in principal than actual practice. If you find that this is very difficult to do, set an amount of money that you have to spend on your credit card monthly and subtract each charge out so you always know how much left you have to spend.
Credit/Debit
You can also use debit cards instead of credit cards and mark it down in your check register for every expense. The downside of using debit cards is when they are stolen. Thieves can clear out your account pretty quickly and the bank is not responsible. I would recommend doing the same thing using your credit card where you can dispute charges and are not liable if the card is stolen or misused. Check out the blog on 3/19/21, Are Credit Cards Really the Devil? for more information about the differences with credit and debit cards. https://realpamelaferguson.wixsite.com/website/post/are-credit-cards-really-the-devil-should-you-cut-them-up-and-only-use-debit-cards
Number of Credit Cards
If you already have a balance (small or large), you need to take steps to get rid of this debt. A good first step is to limit your credit cards to two. You need a Visa or Master Card and then another card like an American Express or Discover. This way, you always have a back-up just in case something is wrong or a certain vender won’t take a specific card. The other cards should be cut up. Do not cancel your account because this can affect your credit score for the worst. Just cut them up and never use them again. There is no need to get department store cards and all the other offers out there, especially if you have a history of overspending. It’s just too tempting to have so many cards and a larger hassle if your wallet or purse ever gets stolen. If you are paid twice a month or every other week, a good rule of thumb is to make sure that the due date on those two cards are split between the checks so you’re not overwhelmed in one pay period.
Perks
In deciding which cards to keep, choose those who have perks like cash back, airline miles, or money toward your child’s college education. These are all cards where you get something back from charging. When you get to the point that you are no longer carrying debt and pay off your cards monthly, you can decide to charge all your purchases and keep little cash on hand. This is good if you’re earning great perks like cash back. You don’t pay any finance charges or late fees but get cash back on all of your purchases. This is a winning scenario.
Make a Call
Also helpful in determining which credit cards to keep are the ones with the lowest interest rates. In the long run, this will be irrelevant since you are no longer carrying a balance, but for now, it can make a big difference. First, you should contact all of your creditors and see if you can get the interest rate reduced. You may be surprised at how easy it is to do this. If they give you any fuss, you can easily tell them that you found a credit card advertisement (you see them all the time) with a much lower rate and will be transferring all your balance to them if they won’t match the rate. Usually this is enough to spur them to give you a lower rate to keep you as a customer.
Plan to Pay-Off
After you’ve reduced your interest rates on all existing cards, put them in order from highest interest rate to lowest. You should pay the minimum on all of the cards except for the one with the highest rate. All extra money should go to pay that card off first. Any extra money that you have should only go to that card while paying the minimum on the others. When you payoff that card, start paying the extra money to the next highest interest rate until you’ve paid off all of your cards and only are using two and paying them off every month. For those of you with a lot of debt, this process might take several years to do, but focus on the process whether than the duration. While you are doing this and still charging items, make sure, by using the deduction method, that you are not adding debt to the bottom line and can afford to pay off everything you bought in the month and then some.
Let’s look at an example and then we’ll add real numbers to help make it clearer.
1) Call all credit cards and ask for a lower rate
2) Stop using all cards except two (perhaps MC, Visa, or Discover)—best not to choose cards with the highest interest rates
3) Rank the cards by interest rate from highest to lowest
4) Commit to paying minimum on all credit cards except the one with the highest interest rate
5) Put all extra money (after paying minimum on all cards) toward the card with the highest rate and continue doing that until paid off. Then cut up card. I would recommend keeping the card for approximately 2 years before even attempting to cancel with the lender.
6) Move to focus extra payments on the next credit card until you only have the two chosen (step 2 above)
Example
Credit card debt of $25,000:
Card 1, interest rate 15%, balance of $7,000, minimum payment due $88/month
Card 2, interest rate 14%, balance of $5,000, minimum payment due, $85/month
Card 3, interest rate 10%, balance of $10,000, minimum payment due, $83/month (KEEP)
Card 4, interest rate 12%, balance of $3,000, minimum payment due, $30/month (KEEP)
1) You have $1,500 total/month (from income) of money for credit card expenses. This means that the monthly amount that you charge (THAT MONTH) needs to be subtracted first. Remember, you are not to put items on credit cards unless you can pay it off every month. For this example, let’s assume that you owe $650 in NEW CHARGES for that month only charged on the two chosen cards. $1,500 - $650 = $850 (that will be used to pay down debt)
2) Pay $650 of new charges on Cards 3 & 4. (Yes, I know that you’re not yet paying down either of this debt.)
3) Pay $83 on Card 2. $850-$83 leaves $767 to pay down debt.
4) Take all $767 and apply it to Card 1, so your balance will now be $6,233.
5) After month 1, you will have the following changes in the balance and amount due
Card 1, interest rate 15%, balance of $6,321 ($7,000-$767+$88 [interest charged]), minimum payment due $79/month
Card 2, interest rate 14%, balance of $5,000, minimum payment due, $85/month
Card 3, interest rate 10%, balance of $10,000, minimum payment due, $83/month (KEEP)
Card 4, interest rate 12%, balance of $3,000, minimum payment due, $30/month (KEEP)
6) Continue with the same steps above until Card 1 is fully paid off and then move to Card 2.
7) Once you’re only left with the cards that you plan on keeping, continue paying them off as well.
Using these numbers ($767 extra to pay down), you’d pay off Card 1 in 10 months.
**These numbers are for calculations only and should not be taken as hard numbers. Credit cards are typically compounded daily, which would most likely increase the amount of minimum payment.
Paying off your credit cards can be overwhelming, but it can be done. It may take years, but you will save yourself so much money and feel a great accomplishment upon paying off each card. Consistency over time is always the key. Stick to the course and you will see results.
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