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TIPS for Getting Out of Debt |
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Always Avoid Paying the Minimum Balance |
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An average American household approximately has $9200 in credit card debts per family. If you're like many
Americans, you try not to think about just how much debt you have and what it's really costing you and if
you did think about it, you might not sleep well.
When making the minimum payment, about 85% of the amount goes towards the interest and only 15% of it goes
towards the principle. As a result, one ends up making minimum payments for more than 30 years. In addition,
if one is late or misses the payment, the interest and finance charges add up. An average card has 18%
interest rate and could be as much as 29% in some of the cards. One wouldn't pay $8,000 for an item that
is clearly marked with a $2,000 price tag, would they? Yet that is exactly what one is doing when they use
a credit card with a high interest and then only pay the minimum balance each month. No wonder you feel
overwhelmed!
Let us say you have a balances totaling less than $6000. You think this will be paid off in no more than a
couple of years, right? And you think the credit card company wouldn't let you take so long to repay them,
would it? But the truth of the matter is yes, it would. In fact, if you took 30 years to pay off your balance,
you would be the ideal customer for the credit card companies. This is how they make their money. Paying the
minimum payment (usually around 2% of the balance) each month, guarantees that one will be filling the credit
card company's cash coffers with one's hard-earned money for several years to come.
It is vital to understand that the credit card companies don't allow one to pay back your debt in small
amounts out of the kindness or mercy of their hearts. Therefore here are some tips to get out of debt:
- One should be absolutely unwilling to pay only the minimum balance on the credit cards each month.
If one can't afford to pay more than the minimum balance, then they must refrain from charging the
goods with the card.
- Don't get any deeper into debt. Save the credit card with the most favorable terms and cut the rest
up. Put the one saved in a safe place (not in your wallet) and use it only for emergencies (not to include
a big sale at Macy's!).
- Pay more than the minimum balance. Much more.
- Shop around for cards with low interest rates, but beware of come-ons that offer a low introductory
rate and then take a big jump. The Internet makes choosing a credit card easy, but be sure to read ALL
the fine print.
- Move balances on cards with high interest rates to cards with lower interest rates.
- Use ones savings to pay down debt. It makes no sense to earn 1 to 3% interest on your savings
account while paying 12 or 15 or 18% interest on credit cards.
- Come up with a written plan for reducing debt systematically.
- Add up all the money one spend each month on credit card payments, and think about what one
could do with this money if you weren't paying it to the credit card company.
One of the best methods of systematically paying off your debts is using a Credit Crunch technique. List all
debts, including the balance and the interest rate for each one. Each month, pay the minimum balance on all
credit cards except the one with the highest interest rate. Pay as much as possibly can on this card each month
until it is paid off. Then start paying as much as possibly can on the card with the next highest rate, while
continuing to pay the minimum balance on the others. Keep doing this until they're all paid off. This is the
only time one should ever pay the minimum balance on any card.
Written by Naz
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