How to Beat Credit Card Debt on Your Own Terms
According to statistics from the Federal Reserve, total credit card debt in the United States is slightly over $793 billion. That’s roughly $16,000 per household! Additionally, 1 in 5 people between the ages of 18 and 24 have “debt hardships” as a direct result of credit card debt.
The impact of credit card debt can be disastrous. It can affect your credit score, which is directly tied to your ability to buy a home or car. Most importantly, it can obliterate your financial security if you’re living paycheck to paycheck and have cards maxed out.
If you have ever received a credit card statement and felt as if you just signed your life over to Visa, Mastercard, or one of the other primary issuers, look no further. With this article, you will receive the tools and insight that will help you destroy your debt without paying hundreds (or thousands!) more of your hard earned dollars in interest.
Make no mistake about it – the sooner you start making progress and attacking your credit card balance, the sooner you can get on your way to financial security and building your wealth.
The most difficult aspect for credit card debt holders is cutting their expenses. This is because there is a standard of living and habits that we find ourselves not wanting to give up. Consider this though: You could give me $10 a week for one year ($520) and at the end of that year, I give you back $1000. Sounds pretty good, right? Well, flip who is giving and who is receiving and now you have a credit card company.
The act of using a credit card is one where a debt is assumed as soon as it is used. If the balance is carried (meaning it is not paid off within the monthly cycle), interest is charged. Essentially, every unpaid credit card transaction is a loan that you are taking out against yourself in the future. That brand new plasma screen tv that’s on sale is much more tempting when you don’t have to pay for it immediately; however, this is the exact psychology that credit card companies rely on to make money.
Instant gratification and a “buy now, pay later” mentality make it easy for them to squeeze more money from each of their cardholders. Bear in mind that this mentality is the EXACT OPPOSITE thought that most wealthy individuals have. So, what can you do?
There is no better time to start attacking your credit card debt than right now. The most difficult aspect for the average debtor is to make the change of cutting expenses. While this may seem like an impossible task, it is far from it. You don’t have to sell your car or immediately find cheaper living accommodations (although if you can do either will relatively low stress, go for it!).
One very effective method is to opt for substituting current expenses with cheaper versions. For example, brew your own coffee in the morning rather than paying $5 for it. In one month alone, this can add $100 to your wallet. If you have a significant other, trade one of your date nights (which can easily cost $300 per month) and swap it for a cheaper option.
Only you can decide where cuts can be made but I assure you, they are there and once you start, you’ll be impressed with the ease at which you save money. The last key to cutting expenses is to have the discipline to apply those savings to your credit cards. Once this begins, it creates a reverse “snowball” effect where the total debt balance decreases at a much faster rate thereby allowing you to pay off your debt more quickly.
A very common mistake made is when debtors make the minimum payment. You’ve probably heard hundreds of times that this is a bad idea but rarely is the other side of the coin presented. Common sense dictates that a single, one-time payment to a credit card is literally the slowest way to pay down a debt. Given this, I have developed a payment system that allows you to tactically win the game against the credit card payment scam.
Let’s begin by looking at what happens when one payment is made each month. If you have a $5000 card that is maxed out, you could expect your monthly minimum payment to be around $120 (assuming you have not missed any payments). If you never used the card, 41.6 payments should get you back to a $0 balance, right? Wrong. 41.6 payments only accounts for the principal, not the interest!
What’s worse – roughly half of your payment is going to go to interest. This means that of $120 that you are paying, only $60 is going to the actual debt that you’ve accrued. This is why it may take upwards of 5 – 7 years (double the amount of time) to pay down a credit card. That’s bad business for you. The key to taking down your debt with the least amount of money hinges on you knocking out the interest portion of the payment.
Here’s how you do it. First and foremost, make your minimum payment before the due date. You’re going to get the treatment on this one every time but consider it, literally, the price you pay. After making the minimum payment, wait roughly 4-7 days and make another payment.
The second payment can be for any amount; however, it must be greater than the amount you spend on the card in the same monthly cycle that your first payment was due. In doing so, your second payment goes exclusively and entirely to the principal balance. Over time, by reducing your principal balance, you also decrease the interest portion at an exponential rate. This is what we in the finance business refer to as “snowballing.” If you can afford to add a third payment within the billing cycle, you can pay down your balance at an alarming rate (almost 17% more quickly!).
We’ve discussed two approaches to tackling credit card debt but do not make the mistake of thinking that they are mutually exclusive. Quite the opposite, they work in sync with one another! You should always be making the minimum payment on your cards so one could conclude that it is already budgeted for. This is where cutting expenses makes all the difference in the world for you.
After you have determined the amount of money you will save on cutting expenses, that amount should be allocated for your second payment. Now, you are not only saving money across the board, you are at the same time lowering your principal balance each month and reducing the amount of interest paid on your card!
No matter what the amount of your credit card debt is, it will take time to pay it down. Unfortunately, credit card balances go up much faster than they come down. Individuals carry large balances over a much longer period of time simply because they are not thinking about how to make the system work for them. If you take these simple measures and put them into effect, you will begin saving money immediately. Furthermore, when you pay your balance off entirely, you will have a disciplined financial mind that will help you much more in the future than ever imagined.
About John Gainer ohn works in finance and has experience in both the private and public sectors. He has a BBA in Business Management from Abilene Christian University as well as an MPA with a focus in International Relations from Texas State University in San Marcos. In his free time, he enjoys golfing, traveling, reading, and spending time with his mini pig Zoë. You can follow him on twitter at @realjohngainer or feel free to email him with questions or comments.