It's that time of year when we set our goals and try to improve over the past year. Hopefully, saving more money is on your priority list. Since the rate of spending in America is at an all time high and savings is at an all time low (negative for 2006), this is a good topic to help you get off to a good start.
In today’s world it takes work and discipline to get ahead and save. And, with the ease of using a credit card it’s even harder to stay out of debt. While many of the financial gurus will tell you to cut up your credit cards, I’d like to share some information with you that will help you get out of credit card debt and allow you to keep your credit cards.
While most of have been lured to the stock market for more aggressive returns, the truth is you can’t get ahead until you get out of debt. And, while these returns haven’t been that spectacular anyway, why gamble? There are many more ways to maximize your return without risking your hard earned money. Before we get into making money though, let’s take care of some simple housekeeping.
One of the easiest ways to earn a guaranteed return, is to get rid of your bad debt. If you are uncertain of the difference between bad debt and good debt, good debt would be a secured loan on an insured asset, like your mortgage. On the other hand, a high interest credit card that is unsecured or uninsured would be bad debt.
If you are one of the typical American families who carries a balance on a credit card, you can enjoy a huge return, as high as 22% by paying off your credit card balances. The interest rate you are paying now will be the “gain” you receive by paying off the balance. So, if your rate is 18% your return will be 18%. If your balance is 6%, your return will be 6%, nothing huge but nothing to sneeze about either. Primarily though, it is risk free and guaranteed. And, after fees and you’ll be way ahead of most stock purchases or other investments.
The average family today has credit card debt approaching $8,000. And the typical interest rate is about 18%, with many paying even more. If you do the math, an 18% interest rate on an $8,000 balance is $1,440 a year. Can you afford to pay $1,440 a year in interest?
Another way to look at it is, if instead of paying $1,440 a year, you had $1,440 to invest every year for the next 20 years and you earned an average return of only 6% percent a year. Over the 20 years you would have invested a total of $28,880 and your money would have grown to $56,150. More good news is that at that point compound interest is really starting to work for you, and in just 10 more years (30 total), you would have saved a whopping $120,674. There is really no reason not to pay off your credit card debt and let your money start working for you.
So, what are you waiting on? The fact is, if you have high interest, unsecured debt and you don’t act now, you are going to dig yourself a hole that will be hard to ever get out of. It’s easy to get in debt and it can be easy to get out of debt. Here’s a few simple steps you can take to clear up your debt and start saving.
Analyze your budget and see if you are spending money needlessly. Determine exactly where your debt is and take charge of paying it off asap. Don’t be tricked into thinking your saving money in the market or in your low interest savings account until you have cleared up your revolving debt. Use your savings if you have to, but pay off your credit cards. You may be able to consolidate credit cards into one low interest payment, still pay it off. Once you do, you will have cash-flow and you can then truly start to save.
Another option may be to refinance your mortgage, but make sure you are getting an attractive rate and that you are NOT using your mortgage to build more debt. This can be a trap, so if you use this method use caution and discipline.
You should keep your credit card accounts open if they don’t have a yearly fee, this will help you maintain a favorable credit score.Pay your credit card balance off monthly without hesitation. This will help you discipline yourself not to overspend. And, it will keep you out of debt.
Once you have paid off your balances, if you have decided to keep your credit card accounts open, you are now in a position to negotiate the interest rate. There are many ways to do this, but the first is to simply ask. Pick up the phone, call the company and ask for a better rate. If you pay your bill on time, they will probably oblige your request. If not, you may have to threaten to close the account or transfer the balance. It is in your best interest to not close the account, but you only want to keep it open if there is no annual fee.
Traps of Credit Cards
- Late Payments - If you have fallen into the trap of paying your bill late, you probably have a high interest rate. Timeliness in paying your bill is the single most important factor in determining your credit score. So, if you haven’t learned this lesson already, pay your bills on time. Banks will sometimes forgive you once or twice, but ultimately there is no excuse for being late.
- Exceeding Your Limit - If you overextend your credit limit, you are asking for a higher rate. Generally, you will be stuck with a fee that can be as high as $50, and your company will most likely raise your interest rate.
- Paying Too High of an Interest Rate - Some banks will try and charge you a higher rate regardless. And, many have hidden fees and a yearly fee. There is no reason to pay a yearly fee or a non-competitive interest rate when so many banks offer credit cards. If your credit score is above 620, then you are in a position to negotiate.
- Closing Your Credit Card Account - When you close your account you are throwing away your history. Your “history” in making payments is a huge factor in determining your credit score. If you close the account, this could negatively effect your score, even if the balance was paid off. So, pay off your balance but keep the account open if there is no yearly fee. If they have a yearly fee, ask them to waive the fee.
- Transferring Balances - If you are savvy you can save yourself a ton of money by utilizing balance transfers. On the other hand, if you are not careful you can cost yourself a ton of money as well. The trap is most low interest balance transfer offers are only for the transfer itself. All new purchases are charged a higher rate, usually more than 6%. Understand the rules before making the transfer and do not make new charges on the account.
- Using Credit Cards for Cash Advances - Using your credit card at an ATM for cash is a bad idea. Cash advances on credit cards can cost you 20% or more. And, the bank will probably make you pay off your regular balance before allowing you to pay off the advance. This is a trick banks use to charge higher rates, so again understand the rules. Debit cards are free with many checking accounts now, so if you need fast cash just withdraw from your checking account using your debit card.
Okay, now that you understand how to keep your credit cards under control it’s now time to start saving some money. If you’re already saving money that’s great, keep saving. While there are many ways to save money, from sticking it under your mattress to buying into a mutual fund, we will focus on safe, secure and guaranteed returns.
If you have a retirement plan at work consider yourself fortunate. However, you want to make sure you understand how it works. If you have nothing, or if you are not getting the return you want, now is the time to start saving. Regardless of where you are in your life, you can start to save now and live your retirement with dignity.
When considering a savings plan or any investment vehicle, here are some questions to consider:
- Are the returns Guaranteed?
- Is there a competitive Return On Investment?
- Is the gain or growth Tax Deferred?
- Is the gain or growth Tax Free?
- Are the distributions upon your death Estate Tax Free?
- Are you allowed Unlimited Contributions?
- Is it Creditor Proof?
- Do you have Investment Options?
- Can the savings be use as Collateral?
- Is it liquid, and do you have Use and Control?
- What would happen to the contributions if you became Disabled?
If you do your research (this does not mean reading the opinions of so called experts on the radio and in the magazines), you will find that few savings plans can promise you all of this. Fortunately, one does, it’s called Whole-Life Insurance. And, nothing else offers you the tax advantages, the guarantees, and the ability to control your money, even after your death. You owe it to yourself and your family to explore the uses of life insurance.
- Use the money you were paying on your credit cards to start to save money.
- Discipline yourself to save monthly or at every pay interval.
- Watch your money grow by utilizing tax and investment strategies.
Learn more about the uses and advantages of Life Insurance with a free financial analysis from Legacy Insurance Agency. We’ll help you to understand the facts about saving for retirement with no pressure and no obligation.
Until next time,
Get out of Credit Card Debt and Start Saving!