If you are completely debt free – and by that I mean you own your home, car and everything else clear – congratulations. You can take a few days off from the blog. For the rest of you, please read on…
Debt is one of the most serious threats to your prosperity you will face. So here’s your homework for today:
Get out the current or last statement from every credit card account you have. Start a list, and write the amount you owe on each one. Then look at the interest rate you are paying on each. You might be shocked.
Most cards start out with an almost reasonable rate. But if you take a cash advance, that gets a different rate. Anywhere from 25 to more than 30 percent! And when you send in your payment each month, they apply it to the installment debt, not the cash advance. They make that the last thing you pay, so they make the most interest.
Then they send you those handy printed checks. Write one and you may find that the interest rate on your entire balance goes up at least five percent. Take their offer to skip a payment and discover that your rate goes up. Accept their credit line increase and your rate may go up. In fact, almost every “nice” offer they make to you has some fine print authorizing them to raise your rate.
Something else you should know about those nice credit card companies…
If you just send that minimum monthly payment they are so gracious to offer you, it will take you 41 years to pay off your balance! So let’s go back to your list…
Add them all up and see what you really owe. Most people avoid this, and like to think they are much better off than they actually are. Get the real picture. Pay attention to the different interest rates. And there could be a huge difference between the cards. Use that information to decide which cards you use, and how you make payments.
But first do this…
Call every single one that has a rate over 12 percent. (Which is likely ALL of them.) Call their customer service number and tell them you are seeing many offers for 5 and 6 percent balance transfers, and you are going to take advantage of some of them to reduce your debt. Say something like, “Before I do that with your card, I wanted to see if you can lower my interest rate, because it seems quite high to me.”
Don’t be surprised if every single one lowers your rate! It may only be two or three percent, but this adds up. Write the new interest rates next to each card and start your plan to pay them all off.
Make the commitment that each month ON EVERY CARD, you will pay ALL of the new charges, and a certain amount to pay down the balance. You can never get out of debt until you stop increasing it. (Make sure you pay the current charges PLUS the monthly finance charge, or you’ll keep slipping backward.) Put the most amount of extra money on the one with the highest interest rate. Do this until it is completely paid off.
When that happens, cut up the card, but don’t close the account. (Your credit report is much better to have open accounts with no balances. This will get you lower interest rates and a better acceptance when you really need credit, to buy a car or home.)
Start paying more against the principle of the card with the next highest interest. Then repeat this process till you are completely done.
Once you start this, you’ll start to get more credit card offers in the mail, many offering those balance transfer options of 4 or 5 percent. Use them and transfer the cards that have the highest interest rates.
Now in this case, if you get card B and use it to transfer card A, go ahead and close the account for card A. You haven’t diminished your credit worthiness or the amount of your credit line. You’ve just reduced the interest you are paying. Don’t fall in the trap of having old cards with zero balances around, tempting you to buy things you shouldn’t.
Do this simple process and you’ll be amazed how quickly you can retire your credit card debt. Start this process today, and next post we’ll look at some other tips on getting out of debt.