Credit cards have long been a preferred method of payment among Americans. The lure of buying now and paying later has made it easy for us to act on our impulses without having to deal with the financial consequences immediately. You know the routine. We head to the mall, armed with a wallet full of credit cards. “I’ll just browse” you say to yourself. But then, it hits you. You find something that you just can’t live without. So, you pull out that shiny card and charge away. That purchase doesn’t feel so good after your bill comes in the mail, however. Don’t get me wrong, buying what you want isn’t wrong, and neither are credit cards. But, carrying a credit card balance can wreak havoc on your finances and trap you in an endless cycle of debt.
According to the U.S. Census Bureau, nearly 160 million Americans have at least one credit card, and the total outstanding balance for all credit cards is a whopping $870 billion. You read it right, billion, not million. That amounts to an outstanding balance of $5,437 per card. At an average rate of 13%, the average American has a minimum monthly payment of $109. Paying the minimum payment every month will take 21 years to pay the balance in full! The total interest charge in this example is $5692, making the total repayment amount $11,399. By paying the minimum payment on your balance, you will still be paying for items that have long been discarded or exceeded their useful life. Paying with credit cards doesn’t sound so appealing now, does it? Let’s take a look at 3 steps to get out of credit card debt.
1. Make a monthly budget
I know, making a monthly budget sounds about as fun as watching paint dry, but this is the first step to attacking your credit card debt. Budgets can be as simple or as complicated as you make them. There are some great tools on the web for those of you who want a simple budget solution. A simple search will yield a lot of great results. It really doesn’t matter how you create a budget, the most important concept here is to spend every dollar before you make it. That way, you can have a better idea of how much you can devote to paying off those credit cards.
2. Pay more than the minimum
Once you have an idea of how much money you have leftover after paying for monthly expenses, set aside a predetermined amount to add to your monthly credit card bill. For example, if you have $100 leftover after you’ve paid all your bills and expenses for the month, add that $100 to your credit card payment. Using the example above, your credit card payment would be $209. Simply paying an extra $100 per month will allow you to pay off your balance in only 7 years and reduce your interest charges to a total of $2816!
3. Tackle debts one at a time
If you have multiple credit cards, choose which one to pay off first and stick with the plan. There are a lot of financial experts out there with varying opinions on which card to pay first. Some say to pay off the smallest balance first, and some insist on paying off the card with the highest interest rate first. Each method has its merits, but the important concept here is to tackle one card at a time. Focusing your energy and effort on one card will allow you to pay it off quicker. You are also less likely to get bogged down with this method. You will feel a sense of accomplishment upon paying that first card off, and this will give you motivation to keep going!
Tim Gibson works with Citizens Savings & Loan in Chattanooga, TN. Citizens is a consumer finance company that provides financial solutions to individuals including personal loans, debt consolidation loans and automobile loans to name a few.