It's imperative that we make consumers more aware of the long-term effectsof their financial decisions, particularly in managing their credit card debt,so that they can avoid financial pitfalls that may lead to bankruptcy.-- Former senator Daniel Akaka of Hawaii
There are few situations as financially painful as being deep in credit card debt. And digging out from a mountain of credit card debt can be a struggle worthy of Hercules. Still, while it's possible and very advisable to not get into credit card debt, it's also possible to get out of it.
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Here are two critical credit card debt tips, either of which can change your financial life for the better:
Tip No. 1: Don't get into credit card debt
First, if you're not deep in credit card debt, but you have occasionally toyed with the idea of making a big purchase with your credit card that you can't afford at the moment, shake off that temptation. Similarly, if you're tempted to draw on the line of credit offered by your credit card, perhaps by using those blank checks they send along with your statement, think again.
Credit card debt isn't like many other debts, such as a mortgage. Consider, for example, that the national average interest rate for savings accounts was recentlyabout 0.6% and the average rate for a 30-year fixed-rate mortgage was recently near 4% -- while some credit cards are charging their cardholders 25% or 30% per year!
Yes, credit cards are a great convenience, but they often serve card issuers much better than card holders. (It's smart to stick with credit cards that don't charge a "penalty APR," so that your interest rate doesn't suddenly skyrocket if you're late paying a bill.)
Credit cards tend to make many people spend more, too -- probably because swiping a piece of plastic through a machine doesn't impart the same feeling of handing over some hard-earned paper currency. A Dun & Bradstreet study, for example, foundthat people spend 12% to 18% more when using charge cards than when paying in cash. And McDonald'sat one time reportedlyobserved customer tickets rising from an average of $4.50 to $7.00 when they used plastic instead of cash.
Carrying high-interest-rate credit card debt and not paying it off is like reverse investing: Instead of seeing your investment grow in value and perhaps collecting interest or dividends along the way, you're paying interest, and a lot of it, to another party. If your debt snowballs into bigger sums from year to year, you'll be poorer and poorer instead of richer and richer.
Carrying a revolving balance on your credit card means that the purchases that you charge will end up costing you much more than their initial prices. Imagine, for example, charging a fancy $1,000 television on a card that sports an interest rate of 18%. If you make the minimum payments of 3%, it will take you more than seven years to pay off the debt, and you'll pay a total of $1,700. If you're carrying $20,000 on such a card and are only able to make minimum payments of 4%, it will take you more than 15 years to pay it off, and will cost you close to $32,000 -- meaning that you'll be paying almost $11,000 in interest!
The best way to not see so much of your money go up in smoke is to steer clear of credit card debt.
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Tip No. 2: Know that you can get out of credit card debt
What if it's too late and you're already deep in debt? Well then, take heart -- because although it won't necessarily be easy, you can pay off that debt. Here are several strategies:
- Tackle highest rates first:Pay off your highest-interest-rate debt first -- because it costs you the most. For example, if you owe $5,000 on a car loan charging you 6% annually and $20,000 in credit card debt with a 16% interest rate, you would tackle the credit card debt first, as it will more effectively wipe out future interest payments and save you money in the long run.
- Tackle smallest debts first:Another approach isn't quite as logical, but it can be more satisfying, and thus might make you stick with your pay-down-debt plan longer. It focuses on shrinking the number of debts you have. List all of your outstanding debts and rank them by size. Then, regardless of their interest rates, pay off the smallest ones first. It will feel like you're getting things done, and you'll have fewer accounts to keep track of, and, perhaps, fewer creditors chasing you, too.
- Negotiate:Many people don't realize it, but you can call your credit card company and ask them if they'll lower your interest rates. Many lenders will cooperate in order to keep you around. If you've been a loyal and good customer, remind them of that -- and the fact that you can always transfer the debt to another lender with better terms. Shaving just a few percentage points off of your rate can save you thousands as you pay down your balances.
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Doing a debt balance transfer to another credit card with better terms is a fine idea, too. Here are some cards worth considering:
Barclaycard RingMastercard: This card chargesno balance transfer fee, and its initial annual percentage rate (APR) is 0% for the first 15 months for transfers made within 45 days of opening the account. The card also offers online access to your FICOcredit score, which can be handy if you're working hard to pay off debts and beef up your score -- perhaps in preparation for getting a mortgage, or taking on other debt. There's no annual fee, and it also won't hike your interest rate if you pay a bill late. (Read our full review ofBarclaycard Ring Mastercardto learn more.)
Chase Slate: This card offersa 0% initial APR for the first 15 months on balance transfers and purchases. Better still, there's no balance transfer fee on transfers made within the first 60 days. Chase Slate also offers Blueprint financial plans to its cardholders to help them with debt-reduction strategies, and it makes your FICO score available, too. Once the 0% teaser rate expires, the APR it charges isn't among the lowest you'll find, so aim to get a lot of debt paid off in those first 15 months. There's no annual fee and no penalty APR, either. (Read our full review ofChase Slateto learn more.)
Citi Simplicity Card: This card featuresno annual fee, along with "no late fees ever" and "no penalty rate ever." For balance transfers, it charges a fee of 3% of the value of your transfer, or $5 -- whichever is greater. That's not great if you're looking to transfer a balance, but note that its initial APR is 0% for 21 months for both purchases and balance transfers. That's one of the longest periods available with a 0% APR and it can be quite helpful. (Read our full review ofCiti Simplicity Cardto learn more.)
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If you're wondering just how you'll find the money with which to pay down your debt, here are some ideas:
- Stop adding to your debt load: Move your credit cards from your wallet to your sock drawer, if necessary. By paying for most things with cash, you'll remove the temptation to charge things you can't really afford.
- Spend less:Spend a little time thinking about how you spend your money, and you'll likely spot some expenses to trim or eliminate.For example, brown bagging three lunches per week instead of buying a $10 lunch can save you more than $1,000 per year. Canceling your cable TV and switching to only streaming movies and TV shows might net you $1,500 or more per year. You might also save hundreds per year on your home insurance and car insurance just by shopping around.
- Make more:If you can increase your income, you can pay off your debt faster. Some ways to do so include working overtime at your job if you can, or taking on a second job for a while. If you work 15 hours per week and earn $12 per hour, you're looking at an extra $9,000 per year, pre-tax. And remember, it doesn't have to be forever. You might make a surprising amount on the side just by tutoring local kids, or selling crafts online.
If you're not saddled with hefty credit card debt, you're avoiding a world of trouble. If you are in that world of trouble, though, don't lose hope. With some creativity and perseverance, you can pay it off and be on your way to a much better financial future.
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