Reducing Credit Card Debt
Reducing Credit Card Debt- Tips from Experts
Your credit card debt does not have you get you down if you take the time to listen to what the experts have to say. When you are smart and savvy about the debt that comes from credit cards this can make it possible for a regular investor to bank a guaranteed 18 percent a year. Doing this constitutes a conscious decision and can help to save the average household as much as $1,500 on an annual basis. You may wonder how this is even possible. Here we look at some pearls of wisdom that come from financial experts. Not only will you learn how to deal with your credit card debt but also how to make your savings grow and continue to grow!
Credit cards can seem like a lifesaver sometimes when you are low on cash or when an emergency arises. However when you are unable to pay the balance off in total at the end of the month that is when your problems really begin. Let us say for a moment that the total amount you owe on your credit cards is $5,000. On these cards you are paying interest of 18 percent. The credit card companies you are dealing with are looking out for their best interests and not yours which means that their number one concern is having a steady stream of revenue coming in. For this reason they set your minimum payment at $150 a month. However making only a payment of $150 a month on a debt load of $5,000 will mean that your debt will continue for many years and in the meantime you will pay, pay, pay.
If you make no new purchases on any of your credit cards and continue to pay the fixed minimum monthly payment of $150 for a number of years then it will take you an estimated three years and 11 months to pay off the $5,000 debt. As far as interest is concerned you will end up paying close to $2,000 in that length of time. That is a great deal of your hard earned money that has gone to paying for the privilege of having credit in the first place.
Those who rely heavily on their credit cards are throwing away what amounts to thousands of dollars year after year. According to the website CardTrak.com in 2007 the median amount of credit card debt being carried by the average household in America was $6,600. In terms of interest charges this works out to be roughly $1,500 that households are paying.
To a financial planner debt equals risk. Very often an abusive use of credit paves the way for financial difficulties in the future. These money experts recommend that debt be limited to such things as the buying of a house. Credit card debt, as opposed to other types of debts is not tax deductible in any way. It is a liability that puts you in a high risk category.
To use an example of this- the credit you receive in the form of a mortgage when you buy a home is considered an asset. You can then sell that asset and make a profit when can then be deducted from your taxes. In a sense the government helps to underwrite the purchase of the asset (the house). This is considered a good debt because it has a positive and profitable side to it.
To look at the flip side of this, when you charge up your credit cards or take out a loan from the bank to purchase a car these are bad debts that are rarely tax deductible and can lead to financial hardships due to the interest you end up paying for them. Add to this the unfortunate fact that the interest charged on credit cards tends to be a great deal more expensive than that charged on other types of debts. On average credit card interest is approximately twice the nominal interest rate that is charged on a mortgage or a home equity loan.
From Owing Money to Saving Money
The debt that you carry on your credit cards can open up an opportunity to start saving more money. When you get rid of the credit card debt you then free up money that can be used for other purposes, such as savings, an emergency fund and investments. In fact financial advisors say that a guaranteed investment opportunity exists here. As mentioned as the start of this discussion, a simple way to earn 18 percent more money is to eliminate the debts you have from credit cards as soon as you possibly can. This debt is weighing you down tremendously and needs to go!
Eliminating the Debt
What then can you do to start eliminating your credit card debt right away? Let us consider a hypothetical example. Let us say that you presently have four credit cards. The first thing you should do according to financial experts is to categorize all of the debt you have. If you are used to making equal payments on all four cards regardless of how much you owe on each one then stop doing this. Instead what you should do is to make the largest payment on the credit card that has the highest interest rate. As your debt gets lower and lower it is a wise idea to keep a cash reserve on hand in order that you will not end up running out of money. If you do not do this then you could end up running your credit cards up once again.
It is always wise to set goals for your money that are realistic. Figure out a plan that will make it possible for you to get rid of the credit card debt as soon as you possibly can. It is also wise to figure out exactly where your money is going on a day-to-day basis. Create what many financial experts call a cash flow analysis. In this way you will easily be able to spot excess spending and will be able to do away with it.
At this time it is essential that you also avoid building up any new debts. It is wise for you to put your credit cards away somewhere so that you will not be tempted to use them. What you want to do is to get back into the habit of paying for daily or weekly purchases with cash instead of credit.
Saving money is important but savings should come after you get rid of your credit card debt. Indeed savings can come from the elimination of debt due to credit cards! Once you are out from under a mountain of debt your money will be your own again and you can start off fresh.
Making Your Credit Cards Work for You, Not Against You
Once interest on credit cards is no longer an issue for you then you can start using your card again, only this time as responsibly as possible. What most people do not realize is that the majority of credit card companies offer their customers a loan that is interest-free from the date that a purchase is made until the billing date. Think about it, you are given an interest-free loan when you buy something with your credit card as long as you pay it off in full before the grace period is over. The period between the date of purchase and the billing date is known as the grace period. However there is no grace period when you decide to get a cash advance. In this case you are charged interest as soon as the cash is withdrawn from your credit card account.
Some credit customers are referred to by the companies as “transactors” while others are “revolvers.” Transactors are cardholders that faithfully pay off their balances each month. This keeps their credit histories good but it does not earn the credit card company any money.
The credit card companies can offer interest-free loans because they know that a great deal of their customers are revolvers. Revolvers are those individuals who carry a balance from month to month, or those who pay off their balances sometimes but they occasionally carry a balance. These are the people that the credit card companies make their money from. Most credit card companies try to get as many revolvers as possible and hope that some transactors will also become revolvers.
When Credit Turns to Trouble
Most financial advisors will tell you that no more than 10 percent of your take home pay should go towards debts on your credit card. According to Howard S. Dvorkin, author of the book, “Credit Hell: How to Dig Out of Debt” (2005) the amount of debt you have on your cards you should be able to repay within a period of 12 to 18 months. Anymore than that then your debt load has gotten way out of control.
Being able to save $1,500 on an annual basis in terms of the interest on credit cards might not seem like a tremendous amount of money in the short-term but it adds up over time. In 30 years you will have saved close to $45,000!