So day five is coming a little late…but this one is a major step to becoming financially free! In today’s swipe and go society, the question isn’t are you paying with paper or plastic, it is credit or debit? As a result, the savings rate all the way up until last year was actually negative for the United States. We spent more than we made thanks to the good people at Visa, Mastercard and the rest. The challenge for people today is to find the balance between our love of the swipe and the funds to pay off the balances.
To this end, there is an article that comes out just about every day with credit card companies raising interest rates on credit cards. Many people with GREAT CREDIT are finding themselves subject to 20% or greater interest rates on their balances today…really without much warning! I also read a promotion yesterday on yahoo.com that was about a bank out west that is offering a credit card with a 79% interest—I thought it was a joke, but it was real and was justified by the bank as the premium that needed to be charged in order for them to take on the risk. http://www.usatoday.com/money/industries/banking/2008-11-09-bank-credit-card-interest-rates_N.htm
Some of you may have heard of the rule of 72 in finance—essentially, divide your interest rate into 72 and that is how many years it takes you to double your money. So for example, the rate of the largest mutual fund at Fidelity (according to Fidelity sources) was .08% (It was their Money Market account). That means that people invested in this account are willing to wait 900 YEARS to double their money!! At the same time, these thrifty savers may have balances on their credit cards at 20% or higher rates—same math shows us that the banks are getting double the money in 3.6 years! The math on credit card balances doesn’t add up. However, if you are like many Americans today, just writing a check to pay off the balance may not be reality. Here are some things you can do TODAY to get out of credit card debt:
- Call your credit card company and NEGOTIATE—that’s right—stick it back to them. If you have decent credit and a decent payment history pick up the phone and ask them to lower your rate. The companies have plenty of people that aren’t paying their bills, so if you are paying, make them lower your rate. The average credit card rate at the end of 2008 was 14%. If you have higher than that, make them lower your payment or move the balance to a credit card company that will give you the right rate. There are even some companies that are still doing 0% balance transfers. Just make sure to read the fine print on start up and annual fees.
- Stop using your credit card and switch to debit—this is a quick way to ensure you aren’t spending more than you have. Also, after you pay off your credit cards, don’t just automatically cancel them. If you are under 30, the Ann Taylor card you took out to get a discount 6 years ago may actually be your longest credit history which actually helps your credit. Just make sure that you have zero balances and then check into your personal situation as to whether it makes sense to close them off or not.
- Make it automatic—set up an automatic payment to your credit card of 10% more than the minimum balance. This could just be a few dollars, but it forces you to pay on time and slightly more than the minimum. Then, if you have extra, make an additional payment during the month—but the automatic payment ensures you stay on track and don’t get hit with late penalties.
- Create a budget—force yourself to take a good look at what you actually have. In Fairfield County, we have a lot, but we spend a lot. If you and your spouse collectively make $250K, but you spend $260K, you are in the hole. From there, see what things you can eliminate. With a new baby, there are lots of additional expenses and they add up—consider going green and making your own cleaning products (I kid you not, I do this and it really works and is super cheap), cutting back on coffee at the coffee shop (who really wants to leave the house to get coffee this time of year anyway?) and not buying that 100th toy for your 6 month old—they really only want to play with paper anyway. If you need a good resource for a budgeting tools, check these out (they also go into debt v. cash): http://www.principal.com/calculators/budget.htm
This mama isn’t saying don’t spend, just spend smart and within your means and don’t make the credit card executives any richer from your pockets!
Alison Smith is a co-founder of ModMa and mother of an 8 month old son. The information contained in this article is for informational purposes only. Consult your financial advisor to consider your individual situation before making any decisions.
