WARNING: REDUCE CREDIT CARD DEBT IMMEDIATELY
When interest rates are rising Credit Card Debt is more dangerous than you ever imagined.
It is an incredibly unfair type of debt. Experts suggest that a large number of people will go bankrupt due to credit card debt in the next year. Debt.org says, “…60% of the people who file for bankruptcy take home less than $500 a week. Try paying for rent, utilities, food and transportation with that … then throw $5,400 in credit card bills on top and see if it feels like you’re drowning financially!”
When you take out a traditional mortgage the interest rate is locked for the term of the loan. 3.5% now is still 3.5% ten years from now.
When you get a car loan the interest rate is locked as well. 5.5% now is still 5.5% three years from now.
Student loans, home equity loans, boat loans, loans on your vacation home…almost all have locked rates.
However, credit cards typically have unfair “floating” interest rates. That means that when you purchase that couch or fuel today the interest rate may be as low as 15%, but a year from now there is nothing to prevent the rate from rising to more than double. That means that your minimum payments will increase as well (although you pay it down at the same speed). On $10,000 you may be paying $165 per month today. If interest rates double your payment will grow to $265 per month (and you will lose $11,000 more to interest payments over 10 years).
Interest rates ARE going to rise in the next year, and quickly.
Therefore, you should pay down your credit card principal as quickly as possible. There are several ways to do this.
A. The OK way: Debt consolidation loan. This way you “lock in” your interest rate at a lower rate. You are paying your credit card company 15-22%. A consolidation loan will lock it in usually at a lower rate (typically about 12-18% if you have a good to excellent credit rating).
B. The “BETTER” way: Get a Home Equity Loan, NOT a HELOC. You do NOT need a line of credit, you need to reduce how much you owe. Just borrow what you need to pay off your credit cards. Interest rates are locked in between 5-8%. Remember, the risk here is that you could lose your home if you cannot pay it off.
C. The BEST way: Pay them off completely. Then KEEP them paid in full each month.
Key things to remember:
1. You should have an emergency fund so you are not forced to go further into debt if your car requires a new transmission or tires.
2. This works well ONLY if you do not create more credit card debt. So, if you do this you should ALSO request that the total of your credit limits on your credit cards be reduced to less than $4,000. Or, cancel several credit cards.
3. With high inflation and high interest rates, you may not be able to afford as many things as you did before. Reduce expenses everywhere you can.
4. Pay more than minimum on every loan (other than your mortgage…because your mortgage probably has the lowest interest rate and can wait until everything else is paid off). Now is the time to reduce the amount of money you owe.
NOTICE: I began a series on financial planning for retirement in August. It is the culmination of about 7 years of research. I will not guarantee it, but I believe almost everyone will discover something they did not know before…even if that person has read hundreds of retirement planning articles
If you know anyone 40 or older, please encourage them to read these articles called “Streams of Retirement Income.”
See Part 1 of A Layman’s Look from Don: Streams of Retirement Income
See Part 2 of A Layman’s Look from Don: Streams of Retirement Income
See Part 3 of A Layman’s Look from Don: Streams of Retirement Income
See Part 4 of A Layman’s Look from Don: Streams of Retirement Income
See Part 5 of A Layman’s Look from Don: Streams of Retirement Income
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