By Jon L. Ten Haagen, CFP ®
We have covered several financial topics and now let’s drill down on some basics to help you focus on what is really important to your financial success.
Pay down your credit cards. Credit cards are a double-edged sword. They can be powerful allies if used properly. But, using credit cards can also get you into a great deal of trouble.
So what is your best ‘investment?’ If you are like a large number of people who have a high credit card balance, paying down your credit card debt may be the best, safe ‘investment’ you can make. I come across too many people who just keep paying off the minimum amounts on their cards. This will, in many cases, take them into old age before they are clear of this burden.
Not having to pay 18-percent interest (or more) on your outstanding balance is as good as earning 18-percent on an equal amount, and it is risk-free and tax-free.
Many people underestimate the opportunity cost of credit cards. If you had $3,000 to invest and $3,000 in credit card debt, which sounds like a better deal: Earning 10-percent on your investment (the historical average stock market return from 1984 through 2016 was over 11.1 percent), or paying 18-percent interest on a credit card debt? Don’t forget that this takes into account the 1987, 2000 and 2008 market corrections.
If you get a 10-percent average return on a $3,000 investment over 10 years, you end up with the sum of $7,781. Now, if you have a credit card debt of $3,000 with an interest rate of 18 percent, at the end of 10 years you have a -$15,701 debt.
It is time to get serious about this situation and take control. There are a number of steps you can take to control your credit cards. Know what kind of card you are using (credit or debit). Cut back on your cards, but do it slowly. If you cut back on a number of cards all at once it could hurt your credit rating. Consult with your financial or tax advisor for guidance. Report lost or stolen cards immediately. You are usually only responsible for $50 of illegal use of your card, but if you call after a week or two and someone has been having a field day racking up large debt, you could be responsible for more. Correct errors quickly. Read your statements monthly and report any strange activity. Hackers will usually hit your card for small amounts at first to see if you are paying attention. If you are not, they will hit your card hard.
Pay credit card debt first. Shop around for a credit card. They are not all created equal. I just changed cards so I get big points for air travel and grocery shopping and smaller credits for every day charges. Always pay your cards off when you get them. It is easy to put your bill on a shelf and forget it, then you get hit for late fees and interest charges.
If you have multiple credit cards with debt on each one, make a list of all the cards and the amount owed and the interest rate you are being charged. Of course, pay off the minimum each month, but pay extra on the highest interest card until it is paid off, then start on the next one until they are all debt free. You might consider finding a card that charges zero interest, but they only do this for a certain amount of time, then they hit you with big increases in charges. Make sure you can pay that amount off before the date to special rate expires. If you need help with getting yourself on the right track give us a call and we will be grad to give you guidance.
Huntington’s Jon L. Ten Haagen, CFP, runs Ten Haagen Financial Services, Inc., a full-service independent financial planning firm, and he is here to answer your questions. In this bi-monthly column, Ten Haagen will answer your financial questions and help you with his expert financial advice. Don’t be shy, our expert is here for you, so feel free to ask away! Email your questions to firstname.lastname@example.org today, and let our expert help you.
*Ten Haagen is an Investment Advisor Representative offering securities and advisory services offered through Royal Alliance Associates, Inc., member of FINRA/SIPC, and a registered investment advisor. He is also an active community member, serving on several nonprofit boards and as executive officer of the Greater Huntington Boating Council.
**BACK IN HUNTINGTON: The offices of Ten Haagen Financial Services, Inc. have moved back to 191 New York Ave., Huntington. Friends and clients are welcome to stop by, check out the new office and share a cup of coffee with the expert!