April 14, 2016
If you have unpaid credit card balances, your situation could soon progress from very expensive to ridiculously expensive.
The majority of credit cards charge interest rates that move up and down based on the level of benchmark indexes, and those benchmarks tend to move in lockstep with what happens to the Federal Funds rate controlled by the Federal Reserve. When the Fed raises its interest rate that means that credit card interest rates are headed higher. And in December the Fed raised its interest rate for the first time since 2006.
In a recent report, the Consumer Financial Protection Bureau noted that if the Fed’s projections for its target interest rate play out, the rise in interest costs for consumers who have credit card debt could be $30 billion over three years.
The bottom line: Paying high rates on credit card debt has always been a bad deal. But it’s likely to become even more costly as interest rates begin to rise. I hope that’s some extra motivation to get your credit card balances paid off.
And right now it’s an especially smart investment. Paying off the balance on a credit card that charges you 12% interest is the same as earning 12% on an investment. If you’ve been paying attention to how choppy the stock market has been lately, earning 12% is not likely.
Some tips for getting out of credit card debt:
• No shame, no blame. I want you to have a positive frame of mind about your goal to pay off your debt. Beating yourself up just depresses you. I want you to be full of optimism and determination. You can do this.
• Consider a balance transfer. If you have a strong FICO credit score of at least 740 or so you may be able to snag a balance transfer to a card that doesn’t charge any interest for a year to 18 months, and also doesn’t charge a fee for the transfer. Search online for “no fee balance transfers.”
• Ask for a lower rate. If a no-fee transfer doesn’t work for you, but you have a high FICO score, call up the credit card issuer and ask for your rate to be lowered. You might mention that you have other cards with better terms, so if this rate can’t be lowered you will shift all new purchases elsewhere.
• Pay the minimum due on every credit card every month. Each and every month keep paying the exact dollar amount you paid this first month. Your card statement will show a smaller “new” minimum as your balance starts to shrink. Don’t fall for this. Keep paying the same minimum as you did this month and it will help you get out of debt much faster.
• Pay at least $50 more on the highest rate card. I want you to pay more than the minimum on the card that charges the highest interest rate. Fifty dollars is just my suggestion. I want you to push yourself to add as much as possible to the minimum payment due on the card with the highest interest rate.
• Keep repeating with your other cards. Once you have the balance paid off on your highest rate card, I want you to take all the money you were directing to that card each month and add it to the card that now has the highest interest rate on an unpaid balance. So for example, let’s say you were paying $340 a month on card 1 and $120 a month on the card with the second-highest rate. Once Card 1 is paid off you will be able to afford making payments of $460 on Card 2: the $120 you were already making, plus adding the $340 you no longer need to pay on Card 1.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.