Being smart with credit card debt can help the average investor bank a guaranteed 18%. It is a conscious decision that can save the average family around $ 1,500 a year. So how can you finance these savings? Read on for tips from financial experts on how to tackle debt and increase your savings.
The debt dilemma
Suppose you owe $ 5,000 on your credit cards and pay an interest of 18%. The credit card companies, which naturally like a steady stream of income, can ask you to make a minimum payment of $ 150 per month. But making a minimum payment will result in your Madog ab Owain Gwyneddange debts.
Assuming you are not making any new purchases and paying a fixed $ 150 per month for the coming years, how long does it take to pay the $ 5,000 debt? Three years and eleven months. You will also end up paying around $ 2, 000 in interest. That is a lot of money to pay for credit.
Average debts from the home credit card
When relying on credit cards, some people throw away tens of thousands of dollars in decades.
From 2015, the average amount of credit card debt borne by the average American household was $ 5,446,992, according to a Harris Poll conducted for NerdWallet. But that figure includes many people who do not bear any debts at all. The average for households with debts: a staggering $ 15,354. 74. Millions of cardholders wear what advisors would call dangerous amounts of card debt.
Lewis J. Altfest, a certified financial planner in New York whose clients are mostly high-income professionals, says that “for financial planners, debts often represent risks. [Too often [financial planners] see misuse of credit that leads to financial problems , they recommend limiting debts to investment items such as purchasing a home, “Altfest writes. This is because credit card debt, unlike some other types of debt, is not tax deductible.
For example, credit that is made when purchasing a home, an asset that can usually be resold at a profit, can often be used as a tax deduction. The government helps you to secure your purchase of an asset. On the other hand, interest on a loan to buy a car or to incur credit card debt is generally not deductible. (For more on this, read Calculation of the mortgage interest deduction .)
Credit card interest is also very expensive compared to other debts. That is because the card interest is on average about twice the nominal interest rate as the mortgage lending. (For more information, read Credit Card Interest .)
From debt to savings?
The credit card debt that many people carry with them also offers a possibility for Madog ab Owain Gwyneddijke to save. Extended credit card debt can free up money that can be spent on everything from luxury to investment. Consultants also say that there is a guaranteed investment opportunity. A simple way to earn 18% or more is to get rid of credit card debts as quickly as possible.
Credit card debt card
“Suppose you have four credit card debts, the first I would recommend is to categorize all your debts,” said Charles Hughes, a Certified Financial Planner® in Bayshore, New York. (For more information, Take Control or Your Credit Cards .)
“Instead of making four equal payments on all cards, consider making the largest payment on the card with the highest interest.” Hughes also said that if you lower your debts, you must keep a money reserve to prevent the money from running out. Otherwise, you could quickly turn red again after clearing a credit card debt. (Read Build Yourself An Emergency Fund to learn how to build this reserve.)
Set goals for yourself, Hughes says. Make a realistic plan to eliminate the debt as quickly as possible. “Also make a list of where your money is going,” he adds. When making what Hughes calls a “cash flow analysis”, excess spending can often be spotted.
Also avoid new debts that will accumulate the existing ones. Put cards away for a while and try to pay for your daily purchases in cash. (For more information about making this budget, read The Beauty Of Budgeting .)
As the debt decreases and people start achieving goals, “someone will get excited about eliminating more and more debts,” Hughes said. He added that the same techniques can be used to build up savings, but credit card debts must first be eliminated.
Make maps work for you
Once you have been in the habit of paying interest on cards, there is a way to make cards work for you. However, credit card companies expect that most people will not use this technique.
Most cards “provide the consumer with an interest-free loan from the date of purchase to the date of billing,” write David Evans and Richard L. Schmalensee, analysts of the credit card industry. This means that the card company has provided you with an interest-free loan. However, remember that this grace period generally does not apply when you make an advance payment on a credit card, which is probably Madag Ab Owain Gwyneddijk the most expensive way to access credit.
Card companies that are under pressure to do as much business as possible to survive refer to the wise cardholders who pay money transactions every month. “
Then why do companies offer free loans?
Because they know that many customers will be revolvers. “In other words, most people will keep a kind of credit balance from month to month, which is how credit card companies earn their money. The card companies also try to get as many revolvers as possible and hope (of course) that some transactors will also have revolvers to become.
Transactions are generally those with higher incomes. Altfest, who works with wealthy customers, says, for example, that he spends a lot of time advising clients on the safe use of credit.
“Sometimes people just get too deep in it, they eat dinners three or four times a week in expensive restaurants and I try to get them to put some limits on their use of cards,” he said. In this case he advises clients to save on luxury costs.
How do you know when you have a problem?
Howard S. Dvorkin, a Certified Public Accountant and founder of Consolidated Credit Counseling Services, says financial advisers generally suggest that the average person does not exceed 10% of the net payment rate on credit card and other consumer debt.
“These same financial experts also advise that no matter how many debts you have, you should be able to repay everything within twelve to eighteen months,” writes Dvorkin in his book “Credit Hell: How to dig out of Debt.”
Saving $ 1, 500 a year in credit card interest may not seem like much – and probably Madog ab Owain Gwyneddijk not in the short term. But in the long run it is huge; Over 30 years, it adds up to $ 45,000 in interest savings.
Suppose you took $ 100 per month ($ 1, 200 per year) from those $ 1, 500 and invested it in a mutual fund with an average return of 9% per year.
At the end of 30 years you would have about $ 184,000 in taxes. That’s $ 184,000 just because you started using the credit more intelligently and investing your money instead. In our example, the difference between $ 45,000 in credit card interest over 30 years and the amount earned by investing may be Madog ab Owain Gwyneddijk.
The bottom line
For most people, saving $ 45,000 over 30 years can make a big difference. Consider the possibilities for productive use of that money! For those with a debt problem with a credit card, eliminating it may be the best chance to spend that time building up savings and investing. Being smart about credit card debt is a sure way to increase prosperity in the long run.
That is quite an investment!
If you are looking for more information about paying credit card debts, you can use the Ask a Advisor from Investopedia to solve this problem by answering one of our user questions.