ByJon L. Ten Haagen, CFP
Credit cards are very convenient and they are also a problem if not used carefully. If you have a huge credit card balance, sit down and think carefully how you got into this situation and work out a game plan to reduce your credit card debt and not get into this situation again. It is easy to get comfortable and the debt grows rapidly until… oops!
Time to take the bull by the horns. Write down which credit cards you have, how much debt you have on each one, then look up the interest rate you are paying on each card. Now, arrange the itemized list by the amount of interest you are paying to carry the card debt – highest to lowest. Next, arrange the list by the amounts owed – highest to lowest. Figure out how much you have to pay at minimum to pay off the interest owed each month on each card so you do not incur additional penalty fees. If one or more of the debts is a fairly small amount, consider paying that one off first so there is one less to address.
Look at the interest rate you are being charged on each card. They will vary and you may be paying as low as 12 percent on one card (or more) and as high as 20 percent-plus on others. Focus on the highest interest rate and pay that down as soon as possible, then address the next highest.
Another approach is to see if you can consolidate a couple of cards – perhaps one of the highest interest rate cards moved into one of the lower rate cards. This will give you a little more money to pay down principle.
Another thought is to switch to a card which gives you a year to a year and half to pay off the debt on it with no interest rate until the time elapses. This gives you time to focus on paying down the principle. Be careful because if you still have that debt when the time limit expires on the zero interest rate, the rate will skyrocket to very high interest rates. Calculate carefully. While doing that you must make sure you are paying the minimum (interest fee) each month on the other cards.
Cut back on the number of cards you have and carry. For some you have to be careful when cancelling a credit card because it may hurt your credit rating.
Examine the benefits or lack thereof for the store cards you carry. Do they really give you any advantage over a regular card? Most really do not. Know what kind of credit card you have and the terms on each. I carry two cards: one for personal and one for business. It makes it easier on me and my accountant at year end. Review offers carefully. Credit card companies are getting more aggressive on the benefits they are offering. Some are 5 percent on travel charged and 3 percent on gas and 1-2 percent for all other purchases. Shop around for the best deal.
Report lost or stolen cards immediately. Most have a grace period and you are charged a small amount (perhaps $50 no matter what is fraudulently charged) if anything, but after a certain period you could be on the hook for all that is charged.
Review your statements every month. Many scammers will charge small amounts on you card and if they see you do not have it corrected, they will then get bold and hit the card for big item charges.
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