September 21, 2007

Save Now and in the Future on Credit Card Debt

By Stan Dyer

Now, here is a subject that needs better coverage at home and in schools. Too many people, as young as high school and college age, have credit cards before they are ready to handle the responsibility. The next thing you know, they have acquired large amounts of credit card debt, do not know what to do, and start establishing poor money management skills that plague them throughout their lives. No matter at what age, or under what circumstance consumers get in trouble, they need all need a plan to get out. The following five-step plan is one idea. This plan will not only help people get out of present difficulties and reduce the amount they end up paying in interest, but also decrease the chances that difficulties will arise again.

Step 1) Make a long-term goal. As with any good plan, we need to know what we are aiming for. A good goal to consider is elimination of all credit card debt forever. It is always cheaper to pay cash.

Step 2) Choose credit cards wisely. Avoid cards with high interest rates and any annual fees. Look for cards with at least a 25-day grace period. Cards that pay rebates offer another small, but welcome, extra benefit.

Step 3) Pay any balances off as quickly as possible. When making only minimum payments, it will take many years to pay down a balance and add many dollars to the amount actually paid. Paying off as much as possible each month puts that lost money back in the consumer's pocket.

Step 4) Negotiate lower rates. Transfer balances to cards with lower rates, but avoid "introductory" rates, as they may rise before the balance is paid. Calling credit card companies to ask for a lower, permanent rate is often successful. Many companies will comply just to keep a customer's business.

Step 5) Avoid bankruptcy and refinancing. Those "quick-fixes" rarely work in the long term, and most people end up right back in the same situation within months. Any negative marks, however, will stay on financial records for seven years. Consumers are better off to use debt situations to establish good money management habits that will return a lifetime of benefit.

The big trouble with this or any similar plan is that people initially feel desperation and urgency, but, as they start to gain a foothold, they relax and often end up back in the very same situation. All people who handle personal finances need to develop sound, lifelong strategies for dealing with credit card debt, or any debt for that matter. It does little good to get through periods of desperation if people are not willing to alter their financial habits and avoid reoccurrences.

When consumers get to the point where they have eliminated their credit card debts, they can start paying themselves. They can make token, credit card payment to themselves each month and stash the money in "no minimum balance" money market accounts paying at least 5%. As those account balances grow, they keep their credit cards mostly for emergencies, but also use them when the money is already in the bank. Using cards for regular expenditures and paying balances in full each month allows cardholders to both take advantage of the 25-day grace period and receive 25 extra days of interest from their money market accounts.

The plan sounds difficult initially, and it takes a good amount of will power to succeed, but consumers will find that sticking to a solid plan will change their habits and improve their lives. In the long term, managing money wisely and reducing the amount paid to creditors will become as natural as listening to music, except the music heard will come from one's own personal cash register.