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Simple Steps to Help Reduce Credit Card Debt
The
United States has a cumulative revolving debt of more than $850
billion, according to the Federal Reserve. A whopping 98 percent of
that figure is comprised of credit card debt -- with 54 million
households in arrears for an average balance of $15,788.1.
If
you are contributing to staggering sum of outstanding credit card debt
in America, you need to start digging your way out, and the sooner the
better. Debt can stand between you and your financial goals, such as
buying a home and being able to fund your retirement. Here are some
simple steps to help you start paying down those charges.
Step 1: Consolidate and pay aggressively. The best approach to paying off debt is to become systematic and
aggressive. If possible, try to consolidate your balances into one card
with the lowest interest rate. Then cut out some of your indulgences
-- lay off the morning coffee fix and brown bag your lunch. The $50 to
$200 a month you can save by making a few small sacrifices should go
right into your credit card payment. If you can't consolidate your
debt, start with the card with the highest interest rate, and double or
triple your monthly payments until you eliminate your balance. Then do
the same thing with the next highest interest rate card, and so forth.
Step 2: Pay debt first, invest later. Conventional wisdom states that if you can earn a higher after-tax
return on your investments than the interest rate you are paying on
your debt, you should invest. Otherwise you should pay off your debt.
As
an example, say you have a credit card balance of $8,000 with a 14
percent interest rate. Given current market performance, paying off the
card before investing is a no-brainer. But even if the stock market
was experiencing an annual gain between eight percent and nine percent,
paying off debt would still be your better bet.
Step 3: Ask for a lower rate. You can accelerate the pay-down process by calling your card issuer
and asking for a reduced interest rate. According to a survey conducted
by the U.S. Public Interest Research Group, more than half (57
percent) of those who called and requested a lower interest rate were
successful. On average, the rate was lowered between seven and 10
percentage points.
It
may take months or even years, but becoming debt free is your first
step to true financial freedom. It is also a prudent move for
individuals who are nearing retirement.
For more information: These Web sites offer information on competitive rates and more. Be sure to shop around for the best rates.
1Source: Federal Reserve, G-9 Report on Consumer Credit, March 2010.
February
2011- This column was authored in cooperation with Financial
Planning Association.
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