I am by no means against credit cards. I use credit cards for virtually all purchases I make: groceries, restaurants, vacations…you get the idea. Cashback and travel rewards are great perks that make credit cards a no brainer for me; however, I don’t rack up a big balance that I know I can’t pay off in full at the end of the month. This is the key to
making your credit card an asset – you should only be putting purchases on your card you know you can pay off in full at the end of the month. If you can’t do this, a credit card can quickly turn into a huge liability.
Millions of Americans are battling with credit card debt because of a lack of education about credit cards (and finance in general, too). They certainly don’t teach us about interest rates in school. If you are in this boat, you are not alone.
Say you get approved for a credit card with a $5,000 limit. This means you have the ability to spend $5,000. What many people don’t understand is if they end up maxing out their credit card and don’t pay it off that same month, they will be charged interest.
The average interest rate for a credit card is about 16%. That means if you’re carrying a $5,000 credit debt, you’re being charged $800 of interest every year! And you will continue to pay $800 every year until you start paying off your credit card. And don’t’ forget – if your credit card company charges an annual fee, you’re paying even more for that credit card. “BUT I’M EARNING POINTS!!!” is often what I hear people tell themselves to justify their high credit card debt. I can assure you, any points or cashback you are earning dwarfs what you are paying in interest and fees.
If you find yourself buried in credit card debt, here’s what you need to do:
- Make a list – the first thing you need to do is compile all your credit card information into one place. Make a spreadsheet in Excel if you can. Include the financial institution, credit card number, your current balance, the card’s current interest rate and the annual fee (if applicable). Do this for every credit card you have. Having an accurate snapshot of your financial situation is critical if you ever want to start paying down those balances.
- Calculate what you can realistically designate for you credit card debt – sit down with at least 3 months of bank statements and calculate how much money is coming in, and what your basic necessities (expenses) are. This includes your rent/mortgage, food, car/student loan payments and yes, even a little fun money. The difference between your income and your basic necessities is what you should be applying to your credit cards every month.
- Develop a plan – there is no one-size-fits all plan. Personally, I would advise you to pay down the card with the highest interest rate first. However, if you’re the type of person that enjoys small victories, use the snowball method, and pay off your smallest credit card balance first. Regardless of which plan you choose, you MUST pay the minimum payment for all your credit cards every month. Doing this will allow you to avoid costly late fees and penalties credit card companies charge for not making at least the minimum payment.
- Inquire about a balance transfer – a balance transfer is when you transfer your existing credit card debt to another credit card because you can get a lower interest rate. Much of the time, you will be charged a balance transfer fee, but if you can get a significantly lower interest rate, the fee will be worth paying and you could save hundreds or thousands of dollars doing a balance transfer.
- Understand that this is a marathon, not a sprint – whether you have $1,000 or $30,000 of credit card debt, you’re not going to pay it off overnight. I liken the process of paying off your credit card debt to working out/eating healthy: you have to treat this process as a lifestyle change and not a short term “financial diet”. There will be bumps along the road. The important thing is to keep chipping away at your credit cards. And don’t forget to keep your eye on the prize of being (credit card) debt free!