These days, millions
of Americans carry a lot of credit card debt.
The average American household has over $5700 in credit card debt. Many people have several cards when all you
really need is one or 2 cards.
The thing is, credit
card companies make money when you carry a balance from month to month. Many cards have a grace period. As long as you pay what you owe before the
due date, then there is no interest owed.
However, if you fail to pay the entire amount, interest is charged in
the next month based on the balance that you carry.
Every day that you
have this debt, the amount of interest goes up.
Discover.com posted an article on how to calculate your daily interest
rate. They say that,” if you divide your
APR by 365, the number of days in a year. At the end of each day, the card
issuer will multiply your current balance by the daily rate to come up with the
daily interest charge. That charge is then added to your balance the next day,
a process called compounding.”
For example: If you have an APR of 25%, then your daily
interest rate would be 0.068493. If you
have $1000.00 in a balance, that comes out to $ 1,020.76 at the end of the
month. By the end of a year, it comes
out to $ 1,284.02 that you owe.
How do you get out
of debt? Well, there are many ways to
reduce your debt. You can consolidate
all of your credit cards into a single loan – normally a bank would charge far
less than credit card for interest.
However, if you still have the credit cards, it’s easy to get back into
debt again and then also have the loan to pay off.
The only tried and
true method for reducing debt is to first reduce your dependency on credit
cards all together. You need to fist
learn to manage your monthly finances.
You need to sit down and figure out what items that you spend money on
each month. If you use a credit card for
everything like most Americans, then use your monthly statement to take a look
at exactly where your money is going. If
you have an electronic statement, that’s even better because then you can sort
and filter based on categories or things bought and paid for.
Next, create a
budget that considers your various expenses.
If you can get onto a budget plan for items such as utilities, then you
should also consider that approach.
Also, it’s time to
take a look at all of your credit sources.
What credit cards do you have?
What other revolving credit sources such as Amazon credit or a sears
card are you carrying? List all of them
out and what interest they have. Look at
which one has a balance and which ones don’t.
Also, look at your car loans and mortgage? Now would be a great time to run your credit
check and make sure that your credit report is exactly where you expect it to
be.
Finally, it’s time
to act. When I decided to get out of
debt with my cards, I started with one of my accounts. I looked at the statement for the monthly
minimum. I then chose an amount that I
could afford to pay above that starting monthly minimum. I used my bank’s bill pay feature to setup a
reoccurring payment for that amount each month.
I did not change or reduce the amount month to month. So, if the minimum is $150 and I could pay
$300, I would pay the $300 each month.
The monthly minimum would get lower, and so would my balance, but I
always paid the same amount.
In the meantime, for
my other credit cards, I setup an automatic pay for the current minimum. This minimum would get lower as the balance
reduced, but the secret is to stay at the same level as when I started.
Also, the other side
was to make sure I don’t go any further into debt. I lived within my budget.
Once I had that
first credit card paid off, I would take the $300 that I was paying for that
card and use it to pay off another card on top of the minimums for that
card. So, on card 2, if the minimum is
$100, then I would pay $400 at this point.
After this second card was paid off, I would roll this $400 into the
next card and so on.
After a card was
paid off, I would consider closing the revolving account or credit card. Yes, your credit score may take a ding from
closing the account. But it will tick
back up again and may even go higher.
These days, I have 2
credit accounts with 0 balance that I carry month to month. Both cards are paid each month and on
time. Once in a while a large item comes
up and it takes a few months to pay it back.
But I never go more than 3 months on either account. Even at Christmas.
Finally, all that
money that I had to pay each month just to get out of debt, well, that rolled
back into my budget. Some goes to
savings. Some goes to other categories
such as entertainment etc.
Credit cards are a
necessary tool in everyday life. The
credit card companies want you to carry a balance month to month. But the best way to make sure your money
stays yours is to take control over how you use them.
One final
warning. When you look at your monthly
statement, look for stealth interest charges.
Some cards charge a monthly fee.
These fees add up. There are some
cards that don’t charge any fee. Use
those cards as your primary, and research other credit cards that don’t have
any fees. Cancel cards that do and if
you need to open an account with a company that doesn’t charge these fees.
Another tip is to
look for cards with low interest rates.
You can sign up for a credit card and transfer your balance to those
cards and also save some money. Those
low interest rates usually only last up to 18 months. But in the meantime while you are paying down
your balance, you can save on interest.
The main idea is to
take a proactive approach to credit.
