The credit crisis – defining debt.
Plainly put, to be in debt is to owe money to a creditor. Creditors allow you to make purchases directly without asking you to pay for anything upfront. Instead, creditors lend you the money for now and ask you to pay it back later. This may seem dandy, but the danger here is something called interest – which is the cost of borrowing money, resulting in you paying more for the item than it originally would have cost you. Buy it with your credit card they’ll say…
Help! I’m in debt – how do I get out of it?!
If you’re already on that hamster wheel, it’s time to reassess. Ask yourself, “How can I realistically pay off my debt?” then set yourself achievable goals.
When it comes to human nature, resisting temptation has never been our strong suit. So, take those credit cards and hide them – out of sight and out of mind. Paying out of pocket will help you to be more aware of your spending patterns and needs vs. wants. Next, breakdown and evaluate your debt. If dealing with your finances is daunting, create a straightforward list of all your debts – which won’t seem so scary laid out in front of you. Now create a strict plan based on the numbers. Remember folks, the numbers don’t lie.
After paying your fixed cost on your mortgage, rent and car you can:
1) Make the minimum payments on your cards that have the lowest interest and aim to maximize your payments on the cards with the highest interest by budgeting and cutting down unnecessary costs.
Do this every month, and a debt will be paid on one of your accounts. Use the extra money to pay off the credit card with the next highest rate – and on and on, until you’re debt free!
2) You could order your accounts by interest rates, from highest to lowest and then make a second list where you order all your accounts by fees, from highest to lowest. Then you could choose an account at the top of each list to stop using. Those accounts that you avoid, will soon be paid off! With the extra money, you can pay off another account – paying more than just the minimum – and close that account faster than the last!
If this kind of strategic system doesn’t sit well, your other option is the Snowball Method.
3) This is where you pay off the smallest card balances first in order to convince you psychologically that your progress is real. With the extra money made from paying off your smallest balance, you can add to the minimum payment of the next card, freeing up your money in small increments that over a few months will help you to pay off a bigger debt!
Avoid the trap – home and car loans…
With home loans, banks will try to hook you by punting the fact that borrowing money to buy a house is far cheaper than borrowing money on your credit card – which must mean that there is nothing to fear, right? Wrong. You know that you still have to pay interest on a home loan but what you may not know is that these loans are generally paid back over an extremely long period. Why is that a problem? Well, the longer it takes to pay back a loan, the more interest you have to pay and the more ridiculously expensive your house becomes. To avoid this, pay back more than the minimum monthly requirement on your home loan, shortening the time you will take to pay it back and decreasing the amount of interest.
When it comes to a car loan, be on the alert for balloon payments. This payment option brings down the minimum amount you have to pay every month, woohoo, but what this actually means is that you won’t own the car until you have paid the amount in full after the entire period – which for a lot of people, means you’ll never own your car. Also note that sometimes the interest on the loan is added as a fixed amount at the beginning, instead of being calculated from what you actually owe. This means you pay the full interest, whether you pay the loan back faster or not. Negotiate a contract that allows you to pay interest on the outstanding amount – allowing you to pay your car off faster and with less interest!
Commit to the plan – that works for you!
Though it may seem more logical to pay off your biggest debts first, the most successful strategy will be the one that suits you best. Do some self-reflection, breakdown your debts and then create a pay-off plan that works for you! If you do that, and commit to it, you’ll be debt free in no time! No more Credit Card Debt!