What are the most common financial resolutions? Save more money, pay off debt and spend less. These are all important goals to help anyone achieve financial security. This week we plan to pay off the debt.
Most people at some point in their lives struggle with managing their finances, and this is especially true for those who live in poverty and have limited resources.
We use debt, or credit, to pay for certain things. We have mortgages for our homes, we take out loans for vehicles, or we use credit cards to buy things. Debt isn’t bad unless we let it get out of control.
Credit is the ability of a person to obtain goods or services before payment, based on the confidence that payment will be made in the future. Debt is something, usually money, that is owed to others.
Last week, NerdWallet released the results of its 2021 US Household Credit Card Debt Study. They found that credit card debt was down, but total debt had increased over the past 12 months. The cost of living is rising faster than household incomes. More than a third of Americans (35%) say their household financial situation has deteriorated in the past 12 months. For households earning less than $50,000 a year, 47% say their situation is worse than a year ago.
The total debt owed by the average American household is now $155,622. This debt can include mortgages, home equity lines of credit, car loans, credit cards, student loans and other household debt, according to the Federal Reserve Bank of New York.
Having debt often creates financial hardship for families. You have to pay interest and possibly additional fees. If you are past due or late with your payments, these interest rates increase and additional charges are added. You also damage your credit score and have to pay more for credit in the future.
The debt that is so high that it needs to be controlled is our credit card debt. An outstanding balance on a credit card can have an interest rate of between 18% and 39%, rates much higher than what you would pay for a bank loan. Americans with credit card debt (which accounts for about half of those with cards) owe a total of $6,006! (That’s a 14% drop from last year.)
How can you pay off your debt? Maybe you could take out a loan and pay it all back, then make monthly payments on that loan, which charges a lower interest rate. If your credit is sufficient, you can subscribe to a balance transfer card which offers you an interest-free period. You move all your debts from your other cards and then work on paying off the new card. Don’t wait for the end of the interest-free period!
If you choose to work with the credit you currently have, you have two options for paying off that debt: high-interest loans or cards first, or small debts first.
Make a list of all your loans. Include
◦ To whom or where you owe money
◦ Type of loan (mortgage, car, student, credit card, etc.)
◦ Amount Due
◦ Interest rate paid
◦ Minimum monthly payment
Sort them from highest interest to lowest interest.
If you choose to pay off the highest-interest debt first, make the minimum monthly payments on the lowest-interest loans, like your mortgage or car loan. Use any extra money you have to pay off the highest interest loan. This will likely be a credit card or payday loan. When paid, you must close this account. Then apply the amount you were paying on the next highest interest debt until it is paid off.
Another strategy that many people use is called the snowball method. Pay more on the card or debt with the lowest balance, and the minimum on everything else. Close this account. Then make larger payments to the card with the next lowest balance, continuing until you are debt free.
Remember that these strategies will only work if you stop using these credit cards! Or at least only charge small amounts that can be paid in full each month.
Let’s say you have a credit card balance of $2,000 and a minimum monthly payment of $30. If you only pay the minimum, it will cost you over $4,400 in interest and take you about 18 years to pay it off. Doubling the payment to $60 would take four years to pay off. You would save about 14 years and over $3,600 in interest.
It’s time to create a SMART goal! A SMART objective is Specific, Measurable, Achievable, Realistic and Time-bound. Remember to prioritize, focus on one goal, and then break it down into smaller, manageable pieces. You might be able to pay an extra $15 a month on a credit card until your balance is down to zero. Is it worth it!