A Plan for Eliminating Credit Card Debt
But there are very few experts who would say that credit card debt is good. This is primarily because in most instances, credit cards feature relatively high interest rates. Therefore, many financial planning experts recommend paying down and eventually eliminating credit card debt as a core personal financial planning strategy.
A simple example helps demonstrate the potentially high cost of carrying credit card debt: If Bob owes $5,000 on a credit card with an 18 percent interest rate and only makes a minimum payment each month of $125, it would take him nearly 23 years to pay off the balance, assuming he makes no new purchases. And during this time, he will pay almost $7,000 in interest, or nearly $2,000 more than the original balance.
A Three-Step Plan
Paying off credit card debt usually requires a certain amount of discipline, as well as a concrete plan. Consider these three steps for getting out of credit card debt:
1. Don’t charge any new purchases.Commit yourself to paying cash for all future purchases or using a debit card, which deducts the money directly from your account immediately. If necessary, shred your credit cards, or consider putting them “on ice” by freezing them in a bowl of water. Then you’ll have to wait for them to thaw out, during which time you may be able to fight off the urge to use them.
2. Set priorities if you have multiple cards with balances.There are two schools of thought here. One is to concentrate on paying off the card with the highest interest rate first, and then move on to the next highest-rate card, etc. The other is to concentrate on the card with the lowest balance first, and then move on to the next lowest balance, etc.
The first strategy will likely result in your saving more interest on your money. However, the second strategy may provide a psychological boost: Paying off a card in full can be very encouraging and can help motivate you to stick with your overall debt reduction plan.
3. Set goals and milestones.Determine to pay off all of your credit card debt by a certain date. Make the goal realistic—the sooner the better, of course, but if your goal isn’t realistic, you may become discouraged if you don’t achieve it.
With Bob’s $5,000 credit card debt, for example, if he were to set a goal of paying it off in 20 months, he would need to pay about $300 a month. During this time, Bob would pay a total of $797 in interest.
The Next Step
Once your credit card debt is paid off, consider depositing the money you were putting toward paying off the debt into a savings account so you can pay for future financial emergencies in cash, instead of charging them. Then, once you’ve built up an adequate emergency fund, consider investing a portion of the money in a retirement plan.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.