Stay Out of Credit Card Debt

Although most people agree with me on this, many people find themselves falling into credit card debt and facing large monthly debt bills. In fact, credit card debt negatively affects a lot of people’s long-term wealth and it is very important that you get out of debt.In our opinion, the real problems with credit card debt are the following:

By purchasing goods before you have earned them, you are in effect borrowing from the future to pay for the present. In essence, it’s the exact opposite of saving or investing and instead of earning money you are paying interest.

Interest rates on credit cards are typically much higher than savings rates and even higher than many alternative investments (like stocks, bonds or CDs).

By carrying big balances on credit cards many people feel that it is hopeless to try to pay them off, so their balances continue to rise. Remember that every bit you pay down makes it easier to pay the rest down.

Once you get into credit card debt you fall further and further behind because in addition to funding current expenditures, you also need to pay for the previous expenditures that are already on your credit card.

If you are already in credit card debt, don’t worry. Follow these rules to get out of debt, and be patient:

Never forget that even paying down a small portion helps. The more you pay down, the easier it is to pay the rest because there is less interest due each month.

ALWAYS pay more each month on your credit card than what you spend on your credit card. If possible, discontinue using your credit card and start paying for your purchases in cash, and only when you have the money.

Don’t lose site of the big picture. It’s often discouraging because it seems like it will take forever to get out of credit card debt. Don’t get discouraged. Think about how nice it will be to start sending those credit card payments to your savings or brokerage account each month when you're out of credit card debt.

If your credit card rates are high, try calling your lender and asking them to reduce the rate. You’d be surprised. I’ve heard of companies reducing their rates from as much as 18% to as low as 7-9%. Not sure if your credit card is a good deal?

Sometimes it pays to transfer balances on your credit cards to lower interest rate credit cards. This is usually a good idea but be careful for two reasons: 1) these low balance transfers often expire in a few months at which point the interest rate may be even higher than your previous rate, 2) new purchases made on these cards will carry the standard interest rate (which is much higher than the balance transfer rate). As you make payments, they will be applied to the low balance transfer portion first.

If you find yourself with more payments than you can handle, you may want to refinance your debt with a lower interest rate loan. Sometimes these loans can cut your interest rate in half or more, especially if they can be backed by your assets (car, home, boat, etc.).

If you have trouble getting a low interest rate loan, it may be advantageous to consolidate all of your loans into one payment or to work with a debt consolidation company to lower both your debt and your debt payments.