If you're like most Americans, you have debt. If you're like many Americans, you try not to think about just how much debt you have and what it's really costing you. If you did think about it, you might not sleep well.
But ignorance never was bliss, and in order to get out from under the burden of debt, you need to face the uncomfortable (and perhaps downright ugly) truth: it may take you 30 years to pay off that credit card balance.
How can this be, you ask? You may have balances totaling less than $5000. Surely this will be paid off in no more than a couple of years. The credit card company wouldn't let you take so long to repay them, would it?
The answer is: yes, it would. In fact, if you took 30 years to pay off your balance, you would be the ideal customer.
It's important to understand that the credit card companies don't allow you to pay back your debt in small amounts out of the kindness of their hearts.
This is how they make their money. Paying the minimum payment (usually around 2% of your balance) each month, guarantees that you will be filling the credit card company's cash coffers with your hard-earned money for many years to come.
You should be absolutely unwilling to pay only the minimum balance on your credit cards each month. If you can't afford to pay more than the minimum balance, you can't afford whatever it was you charged to the card in the first place.
Your payments include both interest and principal (the amount you borrowed). When you pay only the minimum payment, most of it goes towards interest, which is why it takes so long to pay off the original debt. You wouldn't pay $7,000 for an item that is clearly marked with a $2,000 price tag, would you? Yet that is exactly what you're doing when you buy it using a credit card with an 18% interest rate and then only pay the minimum balance each month. No wonder you feel like you just can't get ahead!
If you need to buy on credit, at least do it with your eyes wide open. If you're already in debt, use these tips to get out and get ahead:
1.Don't get any deeper into debt. Save the credit card with the most favorable terms and cut the rest up. Put the one you saved in a safe place (not in your wallet) and use it only for emergencies (not to include a big sale at Macy's!)
2.Pay more than the minimum balance. Much more.
3.Shop around for cards with low interest rates, but beware of come-ons that offer a low introductory rate and then take a big jump. The Internet makes choosing a credit card easy, but be sure to read ALL the fine print.
4.Move balances on cards with high interest rates to cards with lower interest rates.
5.Use your savings to pay down debt. It makes no sense to earn 1 to 3% interest on your savings account while paying 12 or 15 or 18% interest on credit cards.
6.Come up with a written plan for reducing your debt systematically.
7.Add up all the money you spend each month on credit card payments, and think about what you could do with this money if you weren't paying it to the credit card company.
One of the best methods of systematically paying off your debts is what I refer to as the Credit Crunch. List your debts, including the balance and the interest rate for each one. Each month, pay the minimum balance on all credit cards except the one with the highest interest rate. Pay as much as you possibly can on this card each month until it is paid off. Then start paying as much as you possibly can on the card with the next highest rate, while continuing to pay the minimum balance on the others. Keep doing this until they're all paid off. This is the only time you should ever pay the minimum balance on any card.
Melody Millett, with her husband, Steve, said that credit-monitoring companies have serious weaknesses. New York Times Photo by Ed Zurga