Start
a Debt-Free Holiday Tradition
After the binge of a holiday
buying frenzy comes the equivalent of a financial hangover – the January
credit card bill.
In many cases, it takes a full
year or more for families to pay off those bills, just in time to turn around
and do the same thing. The best way to break the credit card debt cycle is
through a combination of prudent debt management and self-restraint. Here are
some suggestions:
Examine the Cost of Credit
Don’t get locked into paying
only the minimum monthly payment due. At that rate, it could take you years to
pay off your balance. Instead, pay off as much as you can each month. The faster
you pay off your debt, the lower your overall cost. And rather than focusing on
paying off the credit card with the highest or lowest balance, pay off credit
cards with the highest interest rate first.
If you have money gathering
dust in a savings account or a low-yielding investment, you’ll earn more by
using it to pay off your credit card debt. Paying off an 18% credit card balance
is equivalent to earning a risk-free double-digit return.
Restructure Your Debt
Consider switching your credit
card balances to a card with a lower interest rate. If you choose a card with a
low introductory rate offer, try to find one that’s effective for at least a
year. Or better yet, call your current issuer and ask for better terms. Many
credit card companies will adjust your rate downward rather than lose you as a
customer.
For anyone who owns a home, a
home equity loan or line of credit is likely to be the least expensive source of
credit. For most taxpayers, using a home equity loan or line of credit to pay
off higher-rate credit card balances means not only lowering the interest rate,
but also converting nondeductible personal interest into tax-deductible mortgage
interest. If you fail to make payments on a home equity loan or line of credit,
you can lose your home; so, use this option only if you’re sure you can meet
the payments.
If you’re reluctant to put
your home on the line, borrowing against your 401(k) plan is another option. The
downside here is that retirement plan loans generally require full repayment
within five years, and if you should leave your job, you’ll need to pay back
the loan or else have the outstanding balance treated as a taxable distribution.
You also may have any interest you pay go right back into your own account.
Pare Down Your Cards
To stop credit card debt from
becoming an annual post-holiday tradition, it is important that you take steps
now to change your spending habits. Begin by paring down the number of credit
cards you own. You need only one, perhaps two credit cards at the most. Use one
to charge all your purchases and keep the other in reserve. Since most
department stores will accept any of the major bank credit cards, there’s
little reason to have store charge cards, many of which charge interest rates in
excess of 20 percent.
Pay in Full Every Month
When used properly, credit
cards can be a convenient and flexible way to make purchases. Just be sure that
you don’t charge more than you can pay off in full when the bill arrives. This
way, you get the convenience of plastic with none of the interest costs.
Switch to a Debit Card
Debit cards, the electronic
equivalent of a check, can be used to buy groceries, pay for restaurant meals,
even order through catalogs. They work just like a credit card -- in fact,
merchants can’t tell the difference. When you use your debit card to make a
purchase, the amount you “charge” is deducted immediately from your checking
account. And best of all, there’s no bill at the end of the month and no
interest charges.
Seek Help
If your debt is too high for you to handle on your
own, contact the Consumer Credit Counseling Service (1-800-388-2227), a
nonprofit organization that educates and counsels people on the use of credit.