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Credit Card Debt
Credit card debt is a result of that wonderful sense of power those small pieces of plastic can elicit. It’s like having a benevolent Santa Claus in your pocket whose sole purpose is to deny you nothing.
“Wow, I can have anything I want!” you crow, which is true up to a point, usually your credit limit.
The problem is that eventually you’ll have to pay for it, and if you don’t pay the total due in one lump sum, that awful credit card company will begin to charge you interest. It’s often the beginning of the end of your control over debts.
Finally, when things get really bad, you start to look for solutions. Here are some of the most popular options:
Cutting Up Your Credit Cards
There are two main points of view on this:
One is that if you can’t keep control of your credit card spending, you should cut up your cards and make all your purchases in cash or by check.
We have two objections to this strategy:
- Carrying large sums of cash in your purse or wallet isn’t very practical. Nor is it safe, if people with dubious scruples happen to notice your bulging wallet.
- You can lose track of your spending if you use cash. If you have a tendency to lose receipts, you may not keep track of what you’ve purchased, knowing only that the cash has disappeared. Credit cards provide you with an automatic record of your spending, and you can use this to discover where your money actually goes. Then you can take steps to change your spending patterns.As for checks, many merchants are now reluctant to accept checks as payment. And the onus is on you to balance your checkbook.
For better or for worse, plastic has become the accepted method of transacting business in the retail market place. You can use it to ruin your financial life or you can learn to use it as an ally.
Handling Credit Wisely
The second approach to handling credit card debt is to change the way you use credit.
Many people keep credit cards as an emergency line of credit. They have one or two cards with high credit limits and use them only when they need to purchase an asset and their other funds are temporarily unavailable.
So you might use your credit card to purchase shares or towards a payment on a property, as long as you can justify the interest payable before you repay the funds. If you can pay the balance in full before the interest-free grace period expires, so much the better.
You might choose to set aside two credit cards with the best credit limits and interest rates for that purpose. And if you are in debt, you can elect to cut up the rest, especially store cards. The one exception might be a card with a low credit limit, to be used exclusively for your regular monthly purchases.
Using A Debit Card
If you have a onging problem with credit card debt, debit cards can provide a safer alternative. They look and function the same way as a credit card, the difference being that you deposit the funds to the card before you start spending, so you’re actually spending your own money, not that of the credit card company.
Some debit cards come with an extra $400 credit limit ‘for emergencies’. The only condition with regard to using these credit funds is that you must pay them in full each month. Like the regular debit card, this also forces you to stay within your budget.
If you wish to use a card with a credit function and pay it in full monthly, calculate your regular monthly expenses and apply for a card with an appropriate limit (within $100 of your estimated expenses).
Using a debit card is really simple way to keep control of your monthly maintenance spending. You can get a second card on the same account for your partner, if you think this won’t become a source of friction.
Eliminating Credit Card Debt
There are two primary systems for getting out of debt.
The preliminary step is to make a list of your debts. Then stop using all credit cards except one (preferably a debit card) for monthly maintenance expenses.
Read the scenarios below to determine which strategy you’ll utilize.
For convenience sake, in this example we’ve used small rounded figures. There are 9 separate debts totaling $13,500, listed from the largest to the smallest. Each has a different interest rate and a different minimum monthly payment. The combined monthly payments are $350. The figures are totally arbitrary and bear no resemblance to actual interest rates and minimum payment rates.
To begin your debt elimination campaign, add 10% of your income to the $350 you normally pay on these debts each month. Let’s say that 10% of $3,000 per month works out at $300.
Here are your choices:
- You can start paying that extra $300 towards the credit card debt with the highest interest rate.In our example, that would be Debt #2. It will take you roughly 11 months to pay it off at $405 per month ($105 + $300). Once it’s paid, you can pay the $405 towards the debt with the next highest interest rate – that would be Debt #7. That would probably take you less than 2 months to clear. Then you move to Debt #1 (the big one). Not very exciting, is it? Like watching paint dry.
- Let’s try an alternative, this time going from the smallest debt to the largest.
Month 1: You take $90 of the extra $300, add it to the $10 you usually pay and wipe out the smallest debt (Debt #9). The other $210 goes towards Debt #8.
Month 2: Your extra $300 becomes $310 because you’ve added the $10 you usually paid towards the recently eliminated Debt #9.
Take $130 from the $310 and wipe clean Debt #8.
The other $195 goes towards Debt #7.
Month 3: Your extra $310 has become $325 because you’ve added the $15 you usually paid towards the recently eliminated Debt #8.
Wipe off Debt #7 by paying approximately $270. The other $55 goes towards Debt #6.
Month 4: Your extra $325 has become $345 because you’ve added the $20 you usually paid towards the recently eliminated Debt #7.
Pay the whole $345 towards Debt #6, leaving a balance of $175 still owing. You’ll wipe this out next month.
You get the picture. This method seems easier because you’re getting little wins along the way. And they occur within relatively short periods of time, which helps keep you motivated. The bills arriving in the mail each month drop from 9 to 8 to 7 within 2 months.
This also gives you the incentive to add in a few extra dollars when you see the opportunity to wipe out a bill in one fell swoop. You can decide to forgo a purchase or outing that can be postponed for a month or two just to get rid of another millstone. You will pay a little extra interest this way but the motivational aspects outweigh the negatives.