Crushing Credit Card Debt
by David Berky
How much do YOU owe on your credit cards?
The average American family is now over $7000 in debt just on
their credit cards. That debt generates an interest charge of over $105 each
month if your card charges the average 18%. If you have missed a payment or made
a late payment (even by one day!), you may be paying up to 27% interest or over
$157 each month.
Most credit card companies require a modest payment towards the
card balance. Modest meaning from $10 to $20 a month. To pay off a $7000 debt at
$20 a month you will not pay off this debt for 29 years.
And what about those interest charges? Paying off a $7000 credit
card debt charging an interest rate of 18% and paying $20 a month towards the
debt, you will pay over $18,400, more than TWICE the original debt, just in
interest.
What if you have more than one card? What if your debt is over
$7000? What can you do? How can you get out of this hole?
There are some techniques that can help you pay off your debt
and do not require expensive loans, invasive credit checks, or expensive
financial planners and accountants. You can also save on interest charges by
paying off your debts in a certain order.
The most effective technique is sometimes called the "snowball"
method. The snowball method suggests that when you pay off one debt you apply
that payment amount to the next debt. Thus the amount you pay on a debt grows
like a snowball rolling down a hill.
For example, you have three credit cards with debts of $5000,
$4000, and $3000 which are charging you 18%, 27%, and 12%, respectively, and you
are paying $150, $125 and $100 each month. By paying these required monthly
amounts you will pay off your $3000 credit card first.
Now that the $3000 card is paid off you have an extra $100 a
month. Put that extra $100 toward paying off your next credit card debt. Now you
are paying $225 a month on the $4000 card and the $150 on the $5000 card. With
this accelerated payment on the $4000 card you will pay off the card earlier and
save some money on interest charges.
Then apply the $225 payment to the $5000 card for a monthly
payment total of $375. Soon this card will be paid off and you will have $375
extra each month to pay off other debts or better yet, INVEST!
So, which debts should get paid off first?
Generally, you want to pay off the debts that are charging you
the highest interest rates first. In the above example you could have added the
$100 payment to the $5000 credit card rather than the $4000 credit card. But the
$4000 credit card is charging you 27% where the $5000 credit card is charging
18%. By paying off the card charging the higher interest rate first, you will
save some money on interest charges.
If this sounds too confusing, you can enlist your computer. You
can search the Internet for the keywords "debt reduction calculator" or you can
visit: http://www.simplejoe.com/debteraser/index.htm and review a product named
Simple Joe's Debt Eraser.
Simple Joe's Debt Eraser helps you create a Rapid Debt Reduction
Plan that is customized to your debts and your situation. Just enter your debts
and the amount you can afford to pay each month. The software will create a plan
telling you how much to pay towards each debt each month until they are all paid
off.
You CAN pay off your debts. The trick is to stop charging
purchases to your credit cards and develop a debt reduction plan. Your plan
should include "snowballing" your payments and prioritizing the debts by high
interest rate.