Getting Out of Debt
So you've been nicked by the double-edged sword of credit. Relied on the convenience of plastic a little too much? Maybe a lot too much?
It’s a big club
Americans are charged up and maxed out. Three-fourths of all households owe someone: an average of $5,000 on their credit cards and $18,000 in installment loans, according to the Federal Reserve Board’s Survey of Consumer Finances (2004).
Getting in debt is easy. Getting out is tough, but not impossible. Many people have done it.
It's too important
Having an aggressive plan to get out of debt and stay out is vital to your financial well-being.
Consider this scary scenario:
Say, you have a $1,000 credit card balance with an 18% interest rate. Making only the minimum required payment each month − often 2% of the outstanding balance, initially $20 − will take more than 19 years to pay off and will cost $1,931 in interest. You read that right – your $1,000 splurge actually cost you almost $3,000.
It’s action time
Getting out of debt requires a strategy, a commitment and − yes − scrimping and sacrifice, but the results are worth it.
Here are some things to consider to get you started on the road to being debt-free:
- Pay more than the minimum each month. As you’ve seen, the longer it takes to pay off a credit card, the more it costs you.
- Keep the card with the most favorable interest rate and cut up the rest.
- Whatever card you do keep, keep it at home, not in your wallet. And use it only for emergencies. (A new CD is not an emergency).
- Once you pay off a card, consider canceling it - but you may not want to cancel too many at a time because that can hurt your credit score.
- Pay on time − or early. Almost one-third of credit card company profit comes from late or over-limit fees. That’s more of your money down the drain.
- Negotiate with your credit card company for a lower rate, particularly if you’ve been a loyal and on-time customer. You may be surprised at what they’ll do to keep a loyal customer.
- Transfer balances from your high-interest cards to those with lower rates, but be aware of any transfer fees.
- Consider bank promotional offers on introductory, low-interest balance transfers, but read the fine print for catches. Is the rate good for the life of the transfer? Does it go up after the introductory period? Are there transfer fees?
- You don’t have to wait for low-interest pitches to come your way. Shop for more competitive rates. Again, read the fine print.
- Use your savings to pay down debt. Why earn 2% on your savings account, when you’re paying 18% interest on your credit cards?
The bottom line
If your credit card debt is spiraling, you could be mortgaging your future while helping credit card companies grow fatter. And whether retirement is just around the corner or a couple of decades away, ask yourself if that’s what you really want to do with your money.