Welcome to my first edition of the MoneyTree.
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Each week we are going to pick a topic that affects your family and your wallet (until the day scientists can figure out how to actually grow money on a tree). And if there are financial issues you’re struggling with, let us know and we’ll address those too.
This week, we are going to talk strategies for paying off credit card debt. There’s no better time to face it, than in January, when the holiday credit-card hangovers set in.
Federal Reserve statistics and other government data show that indebted households (ones with unpaid credit card balances stretching out over several months or longer) have average outstanding balances of around $15,611 as of December 2014. Gulp.
Right. But I’m not here to judge you -- or me -- as to how that balance got so high. Life happens.
Let’s just try to fix it.
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And sure, I can tell you to cut up your card, but that’s more theatrics than realism. To start, you probably need one for emergencies. And let’s face it, I can cut up all my cards, but my darling Amazon still remembers the number. So unless you take the time to call the credit card company to cancel it, no need to break your scissors.
Instead, I got some practical solutions from John Ulzheimer, president of consumer education at CreditSesame.com. First, he recommends we prioritize our debt. “And if you need a spread sheet to do it, you clearly have way too much,” he warns.
After that, here are four options to consider, he says.
1. Pay off most expensive debt first.
The interest rate on your Visa or MasterCard is probably around 15%, but if you have retail cards, like from Macy’s or Target, that rate can be in the mid to high 20s, says Ulzheimer. So consider paying those off first.
2. Pay off the cards that are approaching the credit limit.
Not many people realize that all your credit card companies have access to all your other credit cards, says Ulzheimer. So if you are close to hitting the limit on one card and may face increase interest rates or usage suspension, the other cards will notice and might do the same. They, unfortunately, have that right.
3. Transfer your balance to a 0% credit card.
But you have to be smart about this. Read the fine print. Some cards say you have to pay the transferred balance by a certain date or risk retroactive interest back to day one.
4. Pay your credit card debt off with a home equity loan.
I know a home equity line is tough to get these days, but if you can, consider it. Credit card debt damages your credit score. Home equity line debt is basically benign, says Ulzheimer.
So once your prioritized your credit card debt, you can slowly tackle paying them off. And sure, if you have multiple cards, you still have to make minimum payments on all of them. But try to send your extra cash to the card you put at the top of the list.
And I know that’s easier said than done. It takes some solid budgeting and discipline.
Which we’re going to tackle next week.
Baby steps. This is a process and we will work through it together.
E-mail Tracy your personal finance and tax questions at firstname.lastname@example.org.