Is credit card debt a monkey on your back?
Do you spend more than you make? It is a good bet that unless you are uninimaginably wealthy, you do. Here is a simple but effective method of controlling and reducing your debt in a step by step process.
The first step in controlling your finances is to look at what you are doing with them and the results you can expect from that.
95% of the population however, do spend just exactly, if not more, than they make. Hence the credit card debt in this country (Australia) being well into the billions. It is a safe bet that you are spending just on your limit and saving little if any.
Debit is an area for many of us that is easy to get out of control. Credit card companies, banks, loan companies are making it easier for us to have larger and larger debt and loan capacity and it is just so easy to buy now and pay later.
Enjoy now and pay nothing for 2 years! Is the catch cry.
After the two years (because how many people actually pay within the one or two years and pay no interest?) the fun begins with repayments on a high interest debt that means the original item, now worth a quarter of its value quite often, has basically increased in price by about 25% or more!
Credit cards are murderous. Particularly to the undiciplined. They are the easiest credit to acquire and the banks are forever offering a high credit limit. Plus incentives such as points, flybys etc. These are all totally engineered to get people to use the card and rack up hugh debt. There was even a commercial where a woman insisted her card be used to buy drinks for anyone and everyone so she would get the points on ‘her’ card. She was portrayed as feeling and looking smart. Pure insanity! Why would anyone rack up a debt of hundreds of dollars just to get a few measly points! AND pay interest on that debt also! The ratio is 1 point for every dollar usually. So to get some consumer product for 5000 points that normally costs about 50 dollars, means you have to rack up about 5000 dollars in debt! If you want that product just buy it. No. The only time credit cards with their ‘bonuses’ are of value is when the ENTIRE amount is paid when the bill comes in and so no interest is incurred. Even then many of the cards have a annual charge so you actually pay to have a credit card if you use it or not.
Cut up your credit cards! If you simply must have one. Pick the one that has the LOWEST INTEREST RATE and do not carry it around with you but leave it at home. And restrict the credit limit to within manageable means.
I fell into this trap a few years ago and racked up hugh debts which were difficult to pay off due to the enormous interest created and which I struggled to overcome. One card I had was maxed to the limit of a massive 27,000 dollars. I also found that, apart from the actual loans and repayment difficulties, I was felt mentally ‘trapped’. My attention was beginning to become fixated on the loans and the repayments. It was like being a cage. I would lie awake at nights thinking about it. My hair changed to what I now humourously call silver but was actually grey.
The moment all my debt was paid and I owed no one I had such a feeling of exhilaration, of freedom, of space like I had never experienced before. It was truly amazing.
So, how do you reduce credit card debt?
The main hinderance to reducing credit card debt of course is interest.
So how do you reduce the interest?
There are a number of ways you can reduce your debit and the interest on that. One such method is consolidation. Consolidation is the activity of bringing all your debts into one, usually at a reduced rate of interest. This works fine provided that you do get the reduced rate of interest and a repayment plan that is well within your budget. Also you eliminate the debit instruments, such as credit cards) which you are consolidating. Otherwise the debit simply builds up again. You then have twice as much debt as you started with.
An alternative and more independent method to reduce your interest bill on your debit. Is to follow the following process step by step.
So here is a method of reducing your credit card debt down to zero! Regardless of what it is.
List out all of your credit cards.
Beside the name of each card list out the credit limit, the interest rate and the amount currently owned.
Now take each credit card and cut it up into very tiny pieces like confettii. Have a ceremony and bury them in the garden! Ring each credit card provider one at a time and get them to reduce the credit limit down to as low as possible. If one hard has a credit limnit of 10 thousand dollars, get them to reduce it down to 2 or 4 thousand dollars.
Now ring each one again and negotiate a lower interest rate. You can do this by pointing out that ‘so and so’ card provider is offering a lower interest rate. In many cases you can get a reduced rate. Ask to speak to a supervisor if necessary as the person you are talking to usually does not have the authority to reduce the rate but a supervisor can authorise it.
Once you have done this for all your current card relist them again, but this time in order of highest interest rate to lowest interest rate.
Now pick out the card with the highest interest rate and pay off that one as much as you can. The others pay, each month the minimum required. The idea here is that you work to reduce the interest you are paying each month. The more you may off on the highest rate interest card the less interest you will eventually pay. If you have two or more cards with the same interest rate, take the card with the smallest amount due and pay that off first. The take the nexct one and pay that and so on.
Each month continue to pay as much as possible but certainly more than the minimun required on the credit card with the most debt while paying the minimun required on the balance of the other cards.
The same can be applied to other debts by the way. Hire Purchase, notorious for high interest rates.
Of course, there may be business reasons why you have some debt. Leasing, Mortgage with taxation considerations. Talk to your accountant or financial advisors. However keep in mind not to incurr more debt that you can adequately service even in business and especially in the lean times.