If you sense the monthly bill from your credit card is higher than you want it to be, you're not alone. An estimated 40 percent of cardholders carry debt on their cards from month to month. Various sources quote different figures on the amount, by TransUnion, one of the three nationwide consumer credit reporting agencies, says the average balance on a credit card is $4,878. If you charges $1,000 on your credit card and made the minimum monthly payment — typically 4 percent of the balance, or about $40 — it would take you 65 months to pay off at a cost of $368 in interest. If your financial situation necessitates carrying debt, carrying it on your credit card is not the place you want to do it.
The more you spend in fees and interest on your credit cards, the less you'll have to put into things you really want and need. For example, every dollar that goes toward paying off credit card debt is a dollar that won't go into investments and savings. A new house, a new car, savings for the kids' college education and retirement security, among the most important reasons to have money available, all could fall victim to improvident credit card spending.
And some people use credit cards almost out of habit. They may have the cash on hand, or at least accessible, but they are so used to reaching for the card that they do it virtually instinctively.
But, say that, for one reason or other, you've already put yourself into that hole, is it too deep to be extricated? Once in the predicament, is there a way out?
There is, but it requires some self-discipline. That is the first order of business. Saying no thanks is a difficult proposition for some people, but sometimes thinking of the future is far more important and necessary than thinking of the present. Remember, too, that failure to keep up with credit card payments can jeopardize your credit score, which could be crucial when buying the most important things in life. Most authorities recommend checking your credit report annually. The government provides that you can get one per year free from each of the three nationwide credit reporting agencies — TransUnion, Equifax and Experian. Be aware, though, that experts also warn against soliciting too many reports, as too-frequent checks could be a sign of financial unsteadiness.
Once that mental determination to right your credit wrongs is in place, you're ready to take practical steps to reduce and eventually eliminate your debt. Financial institutions can provide counsel on the practical steps advisable to get onto that path to security. Here are some of those steps:
- Make more than the minimum payment against your credit card debt every month. With only the minimum payment, depending on the amount of the debt, you are destined to take years balancing the ledger. The arithmetic says a minimum monthly payment against a credit card debt of $5,000 would take more than 20 years to wipe clean. And the disadvantage is not just the nagging despair of owing money: All of that extra cash going toward those payments is money that will not go into a more secure future or a more comfortable present.
- If you have more than one credit card, consider paying off the one with the highest interest rate first. That very likely could make more money available more quickly. Some authorities recommend instead paying off the one with the lowest balance, as that would free an entire payment. If you aren't up to those calculations, seek advice from a credit union or bank.
- A balance transfer or consolidation loan may proved wiser still. Debt consolidation loans are usually available that will offer lower interest rates than credit cards carry. However, fees must be taken into account when deciding whether the loan would actually be cheaper over the long haul.
- A home equity loan could be an economical opportunity and the interest may even be tax-deductible, though remember that closing costs may come into play, which could offset — or more — any gains in interest payments. (Also, most experts caution that home equity is a very valuable asset and should not be risked at any cost. The last thing anyone wants is to make the family home vulnerable.)
- Put windfalls, such as tax returns, gifts or bonuses, toward debt payments.
- While working on reducing your debt, try to avoid using your credit cards altogether. If cash is not on hand, don't buy until you're sure you can afford it and you won't be put further into debt.
- Prioritize budget items, such as mortgage, groceries and other expenses, and see if you can eliminate any at the bottom of the list. If you can, money for those non-essentials could instead be put toward your debt.
- Don't use retirement savings against credit card debt. Not only does that imperil future comfort and security. it may expose you to taxes and fees. Some accounts and 401(k)s, for example, carry penalties for early withdrawal. Debt payments may bot be worth those losses.
- Don't defer mortgage payments to make a credit card payment. Choosing to delay one or two monthly payments over 20 or 30 years may seem harmless, but it is not. It will extend the life of the mortgage and increase your overall cost. And, worst of all, done too often, it could at some point even put your home ownership at risk.
The best advice is always to lean on the experts. Consider talking with ALEC if you need help finding answers to your credit problems.