Consumer debt in the United States has totaled $3.4 trillion, with the average household maintaining a staggering $16,048 in credit card balances. Often unexpected circumstances force people to use credit cards to finance their lifestyles. This “strategy” could lead you to a significant level of debt and a low chance of repayment.
Let’s look at some of the costs of credit card debt and what you can do to make sure you don’t end up on the credit card merry-go-round.
Step 1: Track your daily spending
First you need to have a realistic picture of where your money is going. Keep track of your spending for 30 days and compare it to your income. Are you financing a high-fashion lifestyle on your credit card? You’ll need to cut back your spending or increase your earnings to prevent your credit card debt from snowballing.
Once you have these numbers, you can develop a spending plan consistent with your cash flow. If you aren’t sure where to start with your budget, credit unions often offer members access to money management and budgeting programs.
Step 2: Have a limit and stick to it
The next step to keeping your credit card debt at a manageable level is to only spend what you can afford to pay off each month. Using a credit card for purchases is a good way to build credit - but be sure to set a limit of how much you will use the card each month and stick to it.
The average APR (annual percentage rate) on a credit card is around 15 percent. That means, before considering potential late fees and other expenses, the cost to carry a balance of just $3,500 on your credit card will cost you an extra $525. That’s the amount the debt will grow assuming that no other spending on the card takes place.
With temptation around every corner, when heading out for a night with your friends, if you think you might go over your monthly budget - leave the credit card at home this time.
Step 3: Consolidate
It’s easy to get over your head with credit cards. If this happened to you, maybe you need a fresh start by consolidating everything into one payment. There are many ways to consolidate debt into a lower interest rate and manageable payment. You can choose a low-interest credit card or, if you’re a homeowner, take out a home equity loan.
Depending on the amount of debt you have, a personal loan may be a consolidation option as well. This may not be the least expensive way to consolidate, but it will be a lower interest rate than you currently have spread across multiple credit cards. Ultimately, combining your debt into a lower interest rate with one payment will enable you to pay off your debt and save money from the high interest cards you may have just been making the minimum payment on.
Step 4: Begin a savings plan
Once you have your budget and monthly payments under control, the final step is to start a savings plan. Even if it’s a small amount, it’s important to get into the habit. Savvy investors always like to talk about “ROI” (or return on investment). That’s the percentage of the money they invest that they get back and the rate at which they get it.
Paying down your credit card debt can achieve those kinds of returns by saving you an extra 15 percent on every dollar you pay down. It’s the smartest investment decision you can make.
Your credit union can help
Most habitual credit card users fall into a trap. They charge a great deal to one card then sign up for another to take advantage of low-interest rates on balance transfers. Fortunately, Genisys Credit Union is there to help. Call, click or stop by a branch location to discuss the options to get you off of the credit card merry-go-round and create a plan that helps you manage your credit card debt while building a good credit history.
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