Part 15 in a series on how to become successfully self-employed.
It’s easy to pull out the plastic to buy something you don’t really need or to fulfill desires now instead of putting purchases off until you can afford to buy them.
According to the organization, The Truth About Credit (www.truthaboutcredit.org), the average credit card debt for Americans who carry (credit card) balances is a whopping $10,000. As consumers struggle, credit card companies are making bigger profits than ever.
But, in spite of these grim statistics, 40 percent of Americans have no credit card debt. Want to join the ranks of the 40 percenters? Here’s how:
Calculate how much you owe. If you haven’t done so already, make three lists for each of the credit cards you have – balance you owe, interest rates, and minimum monthly payments. Sort the cards, putting the ones with the highest interest rate first.
Negotiate new rates. Rather than pay exorbitant interest rates, make an immediate dent in your debt by calling your credit card companies. Tell them you plan to move your money to another company with a lower rate, and you will find many customer service representatives are authorized to lower your interest rate significantly.
Use lower-interest credit cards. If one of your credit cards has a large balance owing and charges a higher interest rate than another of your credit cards, transfer the debt to the lower-interest credit card. You haven’t eliminated the debt, of course, but because the interest rate is lower, it will not cost you as much. This is a one-time quick fix; if you make a practice of it, you will only dig yourself deeper into a hole. Do this only if you can see a real saving in interest during the period you will be paying off the total amount due.
Cut up the high-interest rate cards. Keep the two cards with the lowest interest rates and close the other accounts. If the credit card companies will charge you a higher interest rate on the balance if you close your account, wait until you pay it off, then cancel it.
Research low-interest cards. If your lowest interest rate is not in the 12% to 14% range, look for another one. They’re out there.
Use cards only for essentials. Discipline yourself to use the two remaining cards to buy only what you absolutely need to charge. Otherwise, use cash or a debit card.
Pay more than the minimum monthly payment. Because of accumulating interest, if you owe $1,000 on a card with 17% interest, it could take you 12 years to pay it off paying the minimum payment – and that’s considering you don’t charge anything more on it. So, use all the strategies you can think of to find enough money to increase your payment.
Apply “leftover” money to next-highest credit card. Once you pay off the first credit card, instead of spending the money you were using to make that payment every month, add that amount to the payment you are making on your next-highest interest card. If the interest rates are the same, tackle the one with the largest balance.
Pay minimum every two weeks. Pay your credit card every 14 days, or half of your minimum every two weeks. What difference will this make? If you make these half payments, you will typically pay off your card in a fifth of the time.
If all else fails, consolidate your debt. To get out of debt in a hurry, take advantage of introductory rates on new credit cards that can be as low as 3.9 percent for six months. Transfer your largest, high-rate balances to this card and discipline yourself to pay as much as possible in the six months you have the low rate. Do not do this repeatedly; many credit cards charge a hefty retroactive penalty if you transfer the balance within a year. Read the fine print and check to make sure how long the low interest rate lasts so you are not stuck paying a still higher rate down the road.
Keep paying the minimum on your low-interest-rate cards. Once you pay off the high-interest-rate cards, then double up your payments until you pay off your low-interest-rate cards.
Use your savings. If you have a savings account, you are probably realizing a very low rate of return. It might pay you to take that money and pay off your high-interest-rate cards. This will work for you only if you do not continue to accumulate debt.
In this stage of paying down your debt, you may want to lock all your credit cards away and bring them out only if there is an emergency.
To reduce the chances of returning to your old ways, turn off the credit card solicitation spigot by calling 1-888-5-OPTOUT or visiting www.optoutprescreen.com and remove your name for five years from pre-screening lists at the three major credit bureaus.
There are more traps to avoid as you deal with credit card companies. If any of the following happen to you, cancel the card immediately and move on:
A tacked-on annual fee. If you sign up for a card with no annual fee and pay your balance each month, you may find the company suddenly tacks on an annual fee.
Lowering the credit limit. Some companies will lure customers to use a cash advance check, but then lower their credit limit. When this happens, the company can then charge an additional fee for being above the maximum limit. Others will simply lower the credit limit once you reach it.
Fees you didn’t bargain for. Some will charge transaction fees for, say, a cash advance. You may also be charged a transaction fee for calling the company’s toll-free number or for not keeping your account active.
Eliminating the grace period. If you pay your balance every month, you may be in for a surprise. Some companies will allow you to avoid the finance charge only if you pay your bill when you receive it.
Part 16, “More Strategies for Getting Out of Debt,” continues the series on becoming successfully self-employed.