Family and Consumer News: Downsizing your debt

By: Adrianne Vidrine

More than one billion credit cards are in use in America today. Used wisely, they can be valuable tools for consumers, but their use represents a substantial portion of Americans’ consumer debt problems. Taking control of one’s debt with a systematic plan for debt reduction is the key to success.

Paying off the balance on a credit card is just about the best investment anyone can ever make. Not having to pay 18 percent or 22 percent interest on a credit card is just as good as earning 18 percent or 22 percent. Risk free. Tax free.

For someone who runs a balance on a card, life is often 20 percent more expensive than it needs to be. If you charge $1,000 on your credit card and pay just the minimum monthly requirement, it could take more than 20 years to pay back that $1,000 - and you will have paid about $2,000 in interest along the way!

There are several problems associated with high debt.

•Cost. Many consumers carry consumer debt of more than 20 percent of take-home pay. This is like working a five-day week and getting paid for four, because an entire day’s pay is unavailable to use for current expenses.

•Long-term debt. Paid at minimum payment levels, high-cost debt becomes long-term debt.

•Emotional distress. Feelings of guilt and shame, quarrels and destructive behavior patterns often emerge when families become financially stressed.

•Life on “the edge.” Families that live from paycheck to paycheck are at risk of financial disaster when an emergency or sudden loss of income occurs.

Credit cards are one of the most expensive ways to borrow money; most consumer debt is money borrowed on plastic. Comparing credit card pricing structure (interest rate, grace period, fees) can save money. The key to selecting an appropriate card is for consumers to decide how they will repay their debts.

If you:

•Carry a balance most of the time? Look for a card with a low interest rate. The larger your balance, the more important a lower interest rate becomes. With a $10,000 balance, interest would cost $2,000 on a 20 percent card and $1,200 on a 12 percent card B, an $800-a-year difference.

•Pay your balance monthly? Choose a card with no or low annual fee and a grace period.

•Charge frequently and pay balance monthly? Consider an enhancement card. These cards offer rewards based on the dollar amount charged. Typical rewards include cash, airline ticket or free gas. However, for cardholders who carry a balance, enhancement cards can be expensive.

There are some things you can do to reduce credit costs:

•Choose lower rate options. There is no reason to carry a high rate card when lower-rate options exist. Comparison shop for a low-rate credit card.

•Shun retail accounts. Retailers charge some of the highest interest rates (18 percent to 22 percent), yet they also accept bankcards.

•Avoid high interest cash advances. Credit card cash advances charge interest rates up to 25 or 30 percent. Few issuers offer grace periods on cash advances. Interest charges begin to accrue immediately and continue until the bill is paid in full. Many credit cards charge a cash advance fee that is based on the amount of the advance.

•Be cautious of transferring balances to cards with low interest teaser rates. These low interest rates are effective for a short period and then jump to much higher rates. Many consumers take advantage of this offer to transfer an existing balance (cash advance) to a lower rate card, but, if the balance is not paid off at the end of the teaser rate, the end result is a much higher cost.

•Avoid nuisance fees. Costly credit card nuisance fees include over the limit charges, late fees, transaction fees and cash advance fees. These fees may cost as much as $25 - $49.

•Pay bills promptly. Promptly paying credit card bills will reduce their average daily balance and lower interest fees.

•Negotiate lower cost. In today’s highly competitive market, many credit card issuers will reduce fees and interest rates, upon request, to attract or maintain the business of customers with good credit histories. Gather information, and think through the issues before contacting the lending agency. Then you can justify your request for a lower rate.

•Repay high interest debt with low interest savings. Consumers with debt, but with more than adequate emergency savings or investments, are advised to rethink their situations. It is unwise to pay high interest on a credit-card balance while earning low rates in a savings account. Repaying a 15 percent debt is equivalent to earning 15 percent guaranteed and tax free.

•Avoid minimum payments. By making minimum payments on an outstanding balance, you will pay more in interest charges. This is especially true if you continue to charge on the account. It would take 23 years and two months of two percent minimum payments to repay a $2,000 balance on an 18 percent credit card.

•Shun skip-a-month payment. Usually offered shortly before or immediately after the holiday season, these offers give consumers an option to skip or defer payments for a period. Remember that interest charges still continue when payments are missed. Additional charges may also apply.

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