So, the big question is: Why is it that so many of us are absolute crap when it comes to paying it back?
Answer: Because I didn't write this article until JUST NOW!
Firstly, just so you know, I'm not here to tell you NOT to buy things. No, you get that enough from your parents, your girlfriend or boyfriend, your wife or your husband, or the support group meetings you go to once a week. No. I'm taking the approach that you've accrued debt and don't realize that you can make some small changes to get out from under it. (If not totally, then at least enough to make you feel better about yourself.)
But what can you do?
Okay, debt sucks. But you know what sucks MORE? Interest fees and Annual Percentage Rates (APRs). These are the "behind the scenes" causes of you staying in debt, longer. Here's an example:
You have a credit card with (just to use the national median) $2,200 on it. (Right now, half of you are saying, "Good lord! What have you been BUYING?!" and the other half, "I WISH that were all I had") And your APR is (using the national average) 15%. By paying the minimum payment (which is usually something like "the interest on your balance + 1%") you will:
- pay off your balance in 19 years
- pay $2,430.61 in interest, more than your balance was, to begin with!
Want a more personal "OMG! I'm being screwed!" moment? Go to Bankrate.com and plug in your own numbers into their calculator. It puts your debt in mind-blowing perspective.
So, what's to be done about it?
Many - and I mean MANY - credit card companies offer 0% APRs on balance transfers. American Express, CitiBank, Discover - you name it. All of them have some form of 0% APR for balance transfers. Swapping your balance to one of these cards will save you a wad of cash in interest payments.
Two things to keep an eye on, when transferring balances:
- Be sure to note the duration of the promotion.
Generally, 0% APR promotions range from 3 months to a year. Keep an eye on the date. Once the time is up, often, the APR can jump, significantly. At that point, transfer your money, again, to a card with another 0% APR promotion.
- Be aware of balance transfer fees.
Some offers charge balance transfer fees which can be as high as 3% (some even have caps on the charge, like American Express, which charges a percent or $200, whichever is lower.) Do a quick bit of math: Is the fee for transferring your balance less than the interest you would have accrued, over the same period, by leaving your debt where it is? Then move it! In the RARE case that it's not, then let it ride, man!
Some complaints I can hear you making:
- "But, opening a new card ruins my credit rating!"
No, it doesn't. It's CLOSING them that's bad. And, hey, even if it DOES negatively effect your rating, I'd bet that going bankrupt will hurt your credit score more. Plus, once you open a new card to get the low-interest promotion and transfer your balance, you probably won't need to keep opening new accounts as your old card - desperately wanting you back - will begin offering you similar promotions. So you can keep ping-ponging the balance back and forth between your two cards. Just repeat until you're paid off.
- "But, with my current card, I get rewards points or frequent flier miles!"
Again - do the math. Did that ONE free DVD of Yanni at the Acropolis you "won" by using your high-interest rate card cost more than the estimated interest you'll be paying back? If so, awesome - you've found a wonderfully magical card run by leprechauns who like to share the wealth from their pot 'o gold. If not, you could've switched cards, bought the DVD yourself, and still have been better off. (Well, "better off" and "Yanni" don't really fit, in my opinion but, meh, to each their own.)
- "But I customized my card to have a picture of my new baby on it!"
To you, sir or madam, I say, "Yes. What better way to remember that you had a kid than putting its face on a piece of plastic. That's true love, that is." Trust me, your kid won't love you more because "Mommy uses my face to buy me things!" In fact, they'll love you more if, in the future, the legacy you leave them is not a mountain of crushing debt.
- "But I have multiple cards with crushingly huge balances on them and my credit has spiraled so far downward, I don't get these wonderful 0.0% APR offers you keep going on about!"
Ah. Well, that's something else all together. A very good question. And that's why I've included the next section of this article. Read on!
It's a silly name for a not-so-silly way of handling multiple debts. Do you have two credit cards and a student loan payment like I do? (Or any combination of credit cards / loans / interest-accruing debts, really.) Then you might want to look into one of the various snowball calculators (like this one) that the Internet is lousy with these days.
You enter in the individual balances, APRs, and the minimum payment that is required on each of them. Then you calculate the TOTAL amount of funds you have in your budget (you know, the money left over after you pay for rent / heat / food?) to put toward your debts. This number should, of course, be larger than the total of the minimum payments you are required to pay to your debt-holders - otherwise, you're not going to get anywhere (See the first section for the futility of paying the minimum on credit cards.) You then plug 'em into the calculator and it gives you a payment schedule.
You can adjust the schedule to have you directing the bulk of your payments toward either the highest-APR account or the smallest balance. Once you nuke (zero-out) one account, the schedule then adds the money you've been paying back on the first account to the money you've been paying to the second account in the list. Thus: "Snowballing". The more accounts you pay off, the bigger the amount you're paying back to one card becomes.
Now, for optimum money-saving, you should select to pay them off in "interest order" - this method puts you on a fast track to paying off the highest interest card / loan while the other debts are put on hold while you pay the minimum payment on them.
"Why," I hear you ask, "do it any other way? Why even have the option of choosing the smallest-ballance method?" Well, firstly, you ask a lot of questions. Secondly, this other method is seen as a self-esteem raiser. A lot of people, when faced with a huge, mountain-sized pile of stress and debt, need all the motivation they can to feel like they can hurdle it. This method let's you knock out one debt, fairly quickly. The sense of accomplishment is a fine reward.
So, if you want the biggest money-saving, go the high-interest-first route. If you want a morale boost, go with the smallest-debt-first option. Either way, you'll be well on your way to financial freedom by just taking these first step.
I know it sounds like a lot - what with my talking about "math" and all - but, really, it's not rocket science. A few minutes of your time can wind up saving you thousands of dollars over the course of your repayment.
The one thing I cannot stress enough: Be vigilant! If you're going to juggle 0% APRs, keep an eye on the date of the expiration of the promotional period and keep transferring your debt to lower APR cards. You'd hate to see all your hard work go up in smoke because you forgot about a big balance on a card that just raised your APR to 37% because your promotion period ran out. If you're going to snowball, stick with it and do NOT shrink the amount you're paying back once you knock out a debt or two. The temptation will be great, but the end-results will reward your stick-to-it-ive-ness.
The future doesn't have to be this raging storm-cloud of debt and misery. Just take the time, right now, to do something about it.
Jeff Somogyi is dealnews' Media Editor. He practices what he preaches: He's an Interest-Order Snowballer AND 0% APR Juggler.