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Avoiding Credit Card Debt
Keep Your Credit Cards, Get Out of Debt
and Save for Retirement
Written by: Barry Page
In today's world it takes
work and discipline to get ahead and save. And, with the ease of using a
credit card it's even harder to stay out of debt. While many of the
financial
gurus will tell you to cut up your credit cards, I'd like to share some
information with you that will help you get out of credit card debt and
allow you to keep your credit cards.
While most of have been lured to the stock market for more aggressive
returns, the truth is you can't get ahead until you get out of debt.
And, while these returns haven't been that spectacular anyway, why
gamble? There are many more ways to maximize your return without risking
your hard earned money. Before we get into making money though, let's
take care of some simple housekeeping.
One of the easiest ways to earn a guaranteed return, is to get rid of
your bad debt. If you are uncertain of the difference between bad debt
and good debt, good debt would
be a secured loan on an insured asset, like your mortgage. On the other
hand, a high interest credit card that is unsecured or uninsured would
be bad debt.
If you are one of the typical American families who carries a balance on
a credit card, you can enjoy a huge return, as high as 22% by paying off
your credit card balances. The interest rate you are paying now will be
the "gain" you receive by paying off the balance. So, if your rate is
18% your return will be 18%. If your balance is 6%, your return will be
6%, nothing huge but nothing to sneeze about either. Primarily though,
it is risk free and guaranteed. And, after fees and you’ll be way ahead
of most stock purchases or other investments.
The average family today has credit card debt approaching $8,000. And
the typical interest rate is about 18%, with many paying even more. If
you do the math, an 18% interest rate on an $8,000 balance is $1,440 a
year. Can you afford to pay $1,440 a year in interest?
Another way to look at it is, if instead of paying $1,440 a year, you
had $1,440 to invest every year for the next 20 years and you earned an
average return of only 6% percent a year. Over the 20 years you would
have invested a total of $28,880 and your money would have grown to
$56,150. More good news is that at that point compound interest is
really starting to work for you, and in just 10 more years (30 total),
you would have saved a whopping $120,674. There is really no reason not
to pay off your credit card debt and let your money start working for
you.
So, what are you waiting on? The fact is, if you have high interest,
unsecured debt and you don't act now, you are going to dig yourself a
hole that will be hard to ever get out of.
It's easy to get in debt and
it can be easy to get out of debt. Here's a few simple steps you can
take to clear up your debt and start saving.
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Analyze your budget and
see if you are spending money needlessly.
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Determine exactly where
your debt is and take charge of paying it off asap.
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Don’t be tricked into
thinking your saving money in the market or in your low interest
savings account until you have cleared up your revolving debt.
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Use your savings if you
have to, but pay off your credit cards. You may be able to
consolidate credit cards into one low interest payment, still pay it
off.
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Another option may be to
refinance your mortgage, but make sure you are getting an attractive
rate and that you are not using your mortgage to build more debt.
This can be a trap, so if you use this method use caution and
discipline.
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You should keep your
credit card accounts open if they don’t have a yearly fee, this will
help you maintain a favorable credit score.
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Pay your credit card
balance off monthly without hesitation. This will help you
discipline yourself not to overspend. And, it will keep you out of
debt.
-
Use the money you were
paying on your credit cards to start to save money.
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Discipline yourself to
save monthly.
Watch your money grow by
utilizing tax and investment strategies.
Once you have paid off your balances, if you have decided to keep your
credit card accounts open, you are now in a position to negotiate the
interest rate. There are many ways to do this, but the first is to
simply ask. Pick up the phone, call the company and ask for a better
rate. If you pay your bill on time, they will probably oblige your
request. If not, you may have to threaten to close the account or
transfer
the balance. It is in your best interest to not close the account, but
you only want to keep it open if there is no annual fee.
Traps of Credit Cards
Late Payments
If you have fallen into the trap of paying your bill late, you probably
have a high interest rate. Timeliness in paying your bill is the single
most important factor in determining your credit score. So, if you
haven’t learned this lesson already, pay your bills on time. Banks will
sometimes forgive you once or twice, but ultimately there is no excuse
for being late.
Exceeding Your Limit
If you overextend your credit limit, you are asking for a higher rate.
Generally, you will be stuck with a fee that can be as high as $50, and
your company will most likely raise your interest rate.
Paying Too High of an Interest Rate
Some banks will try and charge you a higher rate regardless. And, many
have hidden fees and a yearly fee. There is no reason to pay a yearly
fee or a non-competitive interest rate when so many banks offer credit
cards. If your credit score is above 620, then you are in a position to
negotiate.
Closing Your Credit Card Account
When you close your account you are throwing away your history. Your
“history” in making payments is a huge factor in determining your credit
score. If you close the account, this could negatively effect your
score, even if the balance was paid off. So, pay off your balance but
keep the account open if there is no yearly fee. If they have a yearly
fee, ask them to waive the fee.
Transferring Balances
If you are savvy you can save yourself a ton of money by utilizing
balance transfers. On the other hand, if you are not careful you can
cost yourself a ton of money as well. The trap is most low interest
balance transfer offers are only for the transfer itself. All new
purchases are charged a higher rate, usually more than 6%. Understand
the rules before making the transfer and do not make new charges on the
account.
Using Credit Cards for Cash Advances
Using your credit card at an ATM for cash is a bad idea. Cash advances
on credit cards can cost you 20% or more. And, the bank will probably
make you pay off your regular balance before allowing you to pay off the
advance. This is a trick banks use to charge higher rates, so again
understand the rules. Debit cards are free with many checking accounts
now, so if you need fast cash just withdraw from your checking account
using your debit card.
Okay, now that you understand how to keep your credit cards under
control it’s now time to start saving some money. If you're already
saving money that's great, keep saving. While there are many ways to
save money from sticking it under your mattress to buying into a mutual
fund, we will focus on guaranteed, no-risk returns.
If you have a retirement plan at work consider yourself fortunate.
However, you want to make sure you understand how it works. If you have
nothing, or if you are not getting the return you want, now is the time
to start saving. Regardless of where you are in your life, you can start
to save now and live your retirement with dignity.
When considering a savings
plan or any investment vehicle, here are some questions to consider:
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Are the returns
Guaranteed?
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Is there a competitive
Return On Investment?
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Is the gain or growth
Tax Deferred?
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Is the gain or growth
Tax Free?
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Are the distributions
upon your death Estate Tax Free?
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Are you allowed
Unlimited Contributions?
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Is it Creditor Proof?
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Do you have Investment
Options?
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Can the savings be use
as Collateral?
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Is it liquid, and do you
have Use and Control?
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Would the contributions
continue if you were Disabled?
If you do your research, you
will find that few savings plans can promise you all of this.
Fortunately, one does and it's called
Whole-Life Insurance. Nothing else offers you the tax advantages,
the guarantees, and the ability to control your money even after
your death. You owe it to yourself and your family to explore the uses
of life insurance.
Learn more about the uses and advantages of Life Insurance with a
free financial analysis from
Legacy Insurance Agency. We'll help you to understand the facts about
saving for retirement with no pressure and no obligation.
Until next time,
Get out of Credit Card Debt and Start Saving!
Barry Page
President, Legacy Insurance Agency, PLLC
www.legacyinsuranceagency.com
2600 Government St
Ocean Springs, MS 39564
(228) 875-5545
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