Credit Card Debt: How to Take Control
The current downturn in the worldwide economy has resulted in many households feeling the pinch with reduced incomes or unemployment. It is no longer surprising to know that consumer debts, including credit card debts, are soaring higher than ever. In recent years average consumer debts have reached records levels and in many cases have got out of control.
While it is important to pay off all the debts you owe, you may not have sufficient money to cope with the monthly payment on all your existing loans. Prioritising or getting your debts in order keeps in you in control of your finances, and helps you pay off your credit card debts, personal loans, and home mortgage.
To make it easier for you to identify which debts should be paid off first, you may want to prepare a list containing all your loans. The corresponding interest rates, outstanding balance, and the required monthly payment must be found in your list. You can then proceed to sort your debts, starting with the loan which attracts the highest interest rate to the loans which are intended for investment.
You may want to follow these few simple steps to pay off your debts one by one:
• Pay down credit card debt and other consumption borrowings ahead of borrowings for investment (e.g. in property or shares). The interest on borrowings for consumption is not tax-deductible, making them more expensive. Unlike personal borrowings, interest in connection with an investment can normally become a tax deducation which lowers the real cost to you.
• Clear the most expensive debt first. This refers to the debt that bears the highest interest such as credit card debt. This is not necessarily the debt having the biggest principal amount.
It is a common mistake to focus attention on the debt with the largest balance. The interest rates may be higher. Consider this example: credit card 1 has an outstanding balance of $6,500 with 18% interest rate, while credit card 2 has outstanding balance of $10,000 with 11% interest rate. The standard interest in card one would be around $97.50 per month and $91.67 per month with card 2.
You can continue the process of paying off the credit card or personal loan which attracts the next higher interest rate until all of your credit card debts are paid off. Avoid getting into any further debt by using Visa debit instead of credit.
• Make sure you pay on time. Pay at least the minimum required payment, but paying more than the minimum amount is really the best thing to do as you will eliminate the debt faster.Be sure to never miss the due date. Being late on one or two payments will really burn your pockets. Credit card companies can do a lot of things when you miss payments — e.g. impose additional fees or increase the interest rate on your card. Getting rid of your credit card debt can become much more difficult it that occurs.
• Consolidate your loans. Credit lines for debt consolidation are good options to help you lower your interest payments and speed up the process of becoming debt free. One way to do this is through balance transfer of credit card debts to a lower-rate credit card. Bear in mind that debt consolidation loans or transferring credit card debt into a low-rate card are just stop-gap measures. This is not an excuse to rack up more debt. The logic is to reduce your interest costs as far as possible so you can focus your money on paying off the actual balances rather than just paying interest. Make it a self-imposed rule to pay the same dollar amount — or even higher, if possible — on the new low-rate card as you were paying before.
While the economy is not in great shape right now you can still make some changes to get your debts in order. Create the list, sort them in order of priority and then smash them down one by one.
Article by Richard Greenwood of click4credit.com.au
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