There is no dignity quite so impressive, and no independence so important, as living within your means.
We’ve all done it. We approach the check out line with three gorgeous pairs of shoes (insert your weakness here…tractors, electronics, etc. Pick your poison.) and the cashier offers us a deal we can’t refuse…10% off if we open a credit card. Not only do we save 10%, but we don’t actually have to pay for it yet. And with one little signature, we have entered into the world of credit card debt, a dark, scary place that most of us find ourselves trapped in for quite some time. Hook. Line. Sinker.
In March of 2011, the average credit card debt per household reached a staggering $14,743. Cardholders have on average more than 3 credit cards with average interest rates of 14.83%. We start our relationship with the credit cards in college, and unfortunately do not break up with them for years. It’s so easy to make the minimum payment every month, not touching the principle owed, while sky-high interest compounds daily. We’ve all heard Dave Ramsey and Suze Orman yell at us about the desperate need for everyone to cut up their cards and get rid of their debt, but it’s much easier said than done. So how do you stop the vicious cycle?
We spend money we don’t have, on things we don’t need, to make impressions that don’t last, on people we don’t care about.
- Stop Spending. Again, easier said than done. If you do not have money set aside in an emergency fund, you might be turning to the card for every out of the ordinary expense. It’s time to put the brakes on spending and get rid of the card. The first step to paying off credit card debt, is to stop increasing credit card debt. Debt is just a symptom of the underlying problem of overspending and undersaving. Peace of mind and financial freedom comes when we learn to live within our means, and that begins with a step back to consider how we spend the money we have.
- Consider Your Options. When it comes to paying off debt, you have to know exactly how much you owe first. Make a list of all of your cards, along with the balance and interest rate. After you know what you are dealing with, you have a few options.
- Borrow money from savings. This is a controversial way to pay off credit card debt depending on your investment philosophy. The plus side is that the gain is higher using the money to pay off debt than it will earn sitting in a savings account. For example, if you have $1000 on a credit card at 18% interest and $1000 in a savings account earning 4%. To pay off the credit card balance plus one month of interest would be an extra $180, versus the $40 you would earn on the money sitting in a savings account. That’s a savings of $140 in interest! The bad side of paying with savings is that it depletes your savings account. Without money in your savings account/emergency fund, you are more likely to turn to a credit card when an unexpected expense comes up (i.e. air conditioning goes out in the car).
- Negotiate with the credit card company. A simple phone call to the credit card company could save you several interest points. Call and ask for a better interest rate and they will most likely work with you.
- Balance transfer offers. This is another controversial way to pay off credit card debt. Several credit card companies will offer a special introductory offer to new card members in which you can transfer balances from other cards at 0% for a certain time period. This could be a reasonable offer if you have good credit and you are absolutely positive that the balance will be paid by the time the offer ends (i.e. You have a balance of $2000 and you are planning to pay it off with your annual $5000 year end bonus). Beware of transfer fees (usually anywhere from 3-5%), annual card fees and the end of the promotional period.
- Debt consolidation loan from your local bank. If you have good credit and a good relationship with your local bank, you might be eligible for an unsecured loan to consolidate and pay off your credit. The benefits are a lower interest rate than the credit card company, and a fixed monthly payment. Beware of the term. If the term is too long, you might pay more in interest than you would have if you would have left the debt with the credit card company.
- Make a plan. To get out of debt and stay out of debt, you have to have a plan. Not only do you have to have a plan, you have to be committed to the plan and stick to it.
- Make a budget. How much do you make each month? How much do you spend? There are several tools available to help you with budgeting, my favorite being pearbudget.com. After you know what you make and what you spend, examine what you can cut out. Any extra money can go toward…
- Debt snowball. Factored into your monthly budget should be your debt snowball. Snowballing is a simple way to paying off debt, starting with the debt with the highest interest rate. For example, you have three cards, A, B and C. A has an interest rate of 20%, B of 18% and C of 14%. According to your budget, you can afford to put $150 toward your debt snowball and the minimum payments on B and C are $50. Your snowball amount would go toward card A, while you would pay the minimum on B and C. Once card A is paid, you would move onto card B, paying the minimum $50 plus the $150 debt snowball you were paying on card A. Once card B is paid off, move onto card C paying the debt snowball amount of $150, plus the minimum on card B, $50, plus the minimum of $50 that you were paying on card C. By the time card C is paid off, your snowball would have reached $250. After all your credit card debt is paid off, you can use the debt snowball you created to put toward your…
- Emergency Fund. It’s recommended that you have 3-6 months of expenses set aside in an emergency fund to cover unexpected expenses and emergencies. Having this fund eliminates the temptation to use credit cards, thus wiping out credit card debt for good.
Credit card debt is not easy to conquer, but with a plan and some motivation, you can conquer it for good.