Attack Credit Card Debt In Two Steps
Many Americans are worrying about their credit card debt
, especially now that the economy is not producing jobs. The average US family has a $7 thousand dollar balance on their cards, and a $16,000 debt load if we do not count the home loan.
In recent times, most of us have seen our interest rates increase too. Higher interest rates cause a couple of problems. It takes longer to pay off debt, and we spend more money servicing the debt we do carry. You understand that higher interest rates mean that more of your payment goes to the actual debt while more pays the interest.
I can explain some dramatic examples with a fairly low credit card balance too. Take a $1,000 balance on a credit card where the borrower pays $100 a month.
For a twenty-three percent interest rate, it takes a years worth of those hundred buck payments. In the end, they have paid off the debt plus another $123 in interest. Imagine running up $1,000 in debt for travel, a dental emergency, or car repairs, and not being able to pay if off for a year!
But if a borrower can find a 0% credit card balance transfer offer, they can do much better. Many offers start off with a zero percent rate for 6 months, and then they reset to a moderate 11 percent rate after that.
The hundred dollar payments will be applied to the balance for the six months of the 0% offer. So $600 will be paid off. Then the interest charges will only be calculated on the remaining four hundred dollars. That amount can be paid in about four months. Once month will include an extra $10 or so to pay off the interest.
So with the lower rate, the borrower pays much less interest and gets the balance paid off much sooner.
Again, there are other benefits. A lower balance may help raise credit scores. Once big factor that agencies use is the percentage of money that is charged vs. the limit. This means that a consumer with a higher credit score has a much better chance of paying off future loans in a timely manner too.
Make an attack plan that you can stick with. Some people like to pay off smaller balances first. It is true that a loan that is totally paid off can give us a feeling of satisfaction.
Financial experts tell consumers to apply the most money to higher balances. For example if you have 3 cards, with balances of $200, $800, and $2,300, you should try to pay the most money to the card with the $2,300 balance and just pay the minimums on the lower cards.
Why does this strategy work? Well, the higher amount also keeps getting charged with the most interest. And the higher balance is probably closer to the credit limit. The idea is to spend the least amount of money on interest payments, get debt paid down the quickest, and to keep as far away from the credit limit as possible.
You need to examine your own unique situation and come up with a plan that works for you. The important thing is to commit to a strategy to reduce your debt, and then to stick to the plan.
by: Marilyn Katz
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