The vast majority of credit-card-holding Americans accrue more debt per month than they can pay off. I did that, myself, for five years, before deciding that enough was enough. I did some hard research, talked to professionals, and slashed my budget in order to start paying off the debt. But having the credit card in my wallet was tooooo tempting.
So this is what I did (and you can, too!):
I compared the APR rate for purchases and for balance transfers on all my cards. To me, 10% APR or below is a good rate, 13% APR or above is a bad rate (20% or above is a rip off).
The cards with a bad rate, I cut up.
The cards with a good purchase rate, I put in a storage box in the garage, under some stuff.
If any of the cards had an outstanding balance transfer APR rate, I transferred as much of the "bad card" balances as I could to them.
I checked with my banks (I use two different local credit unions, which I've found generally offer better rates than national banks) on their loan interest rates and limits. What I found was that I could get a several thousand dollar loan with a 4% interest rate (as opposed to paying off several thousand on a credit card with a 10% interest rate).
I applied for a low-interest loan from my bank, and used that money to pay off my credit card debt (starting with the highest APR rate balances, and then moving to the rest).
The benefits of this kind of plan are multi-fold:
- You are actively working to reduce your debt. If you pay off even ONE credit card, your credit score goes up (and stress goes down).
- You are consolidating your debt, making it easier to track and manage.
- You are ensuring that the APR you pay on your existing debt is as small as possible, so it takes less time to pay off the debt.
- Your bank sees that you are a responsible lender, meaning they are more likely to lend to you in the future, if there is an emergency or large purchase in your life.
The most common arguments that I hear from people about doing this are:
"It sounds like a big hassle"
It really isn't. It's maybe a total of three hours out of your life, tracking down and comparing data. Those three hours can literally save you hundreds of dollars in APR, as well as stress and credit score and such. Trust me, managing two or three debt amounts is a lot less hassle than managing six or seven of varying amounts.
"What if I need my credit card for something?"
That's fine- keep one around and intact (with the best APR) in case of emergencies. Just don't keep it SO handy that a Venti quad shot mocha becomes said 'emergency'.
"My credit card has rewards"
This is a tough one. Everyone wants to feel like they're getting something for nothing. That's how these cards with ridiculously large APRs can hook you. Sit down with your statement. How many points are you ACTUALLY earning? Do you make the majority of your purchases (over the past 6 months) at the place(s) that earn you points? Are you anywhere near (within 6 months of future purchases) reaching a point goal that gets you something you need/want? Hey, I'd like a free plane trip, too, but there is no logic in SPENDING hundreds of dollars to save a hundred.
"I don't have a bank account"
There are a variety of reasons why people chose not to have a bank account, and I do understand the logic there. However, most banks are FDI insured, meaning you will never lose your money through them. And most banks now offer rewards for doing things like direct deposit and automatic bill pay online. Again, having a little nest egg of money in a financial institution boosts your credit score. Consider opening an account someplace that offers a high-yield APY on your money (4% or above, generally), and watch as your money sits in an account AND multiplies.
"I just lost my job/savings/etc"
Yes, this would be the best excuse. I'd still advise consolidating your debt as much as possible, but if you're struggling to make ends meet, debt reduction goes a little farther down the 'to-do' list. My biggest red flag here is to make sure you CALL your credit card institution ASAP and let them know your change of status. Some will allow you to defer payment for a month or two, without any penalty. Others will work with you to reduce the monthly bill that you pay. But you have to be PROACTIVE and honest with them first.
Good luck, and happy debt-destroying!
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Labels: debt, DIY