David Lerner Associates: Money Smart Tips for Credit Card Debt
38 percent of all American households carry some credit card debt and the average for balance-carrying households is $15,779. Americans between 45 and 54 years old appear to have the highest balances of any age group. Credit card debt is not a good idea at any age, but when you’re getting close to retirement it could be a significant barrier to future financial security.
The problem with credit cards is the relatively high interest rates. Which is why many financial planning experts recommend paying down and eventually eliminating credit card debt as a core personal financial planning strategy.
Here’s a good example:
If Sam owes $5,000 on a credit card with an 18 percent interest rate and only makes a minimum payment each month of $125, it would take him nearly 23 years to pay off the balance, assuming he makes no new purchases. And during this time, he will pay almost $7,000 in interest, or nearly $2,000 more than the original balance. If Sam is in that 45 to 54 age group, 23 years means he will still be saddled with this debt in his retirement.
A Three-Step Plan
Paying off credit card debt usually requires a certain amount of discipline, as well as a concrete plan.
1. Do a little plastic surgery – cut up the cards and don’t charge any new purchases. Commit yourself to paying cash for all future purchases or using a debit card, which deducts the money directly from your account immediately.
2. Set priorities if you have multiple cards with balances. There are two schools of thought here. One is to concentrate on paying off the card with the highest interest rate first, and then move on to the next highest-rate card, etc. The other is to concentrate on the card with the lowest balance first, and then move on to the next lowest balance, etc.
The first strategy will likely result in saving more interest on your money. However, the second strategy may provide a psychological boost: Paying off a card in full can be very encouraging and can help motivate you to stick with your overall debt reduction plan. Note When you have paid off a card don’t close it. That can negatively affect your credit score.
3. Set goals and milestones. Mark the date for when you will have paid off all of your credit card debt. Make the goal realistic—the sooner the better, of course, but if your goal isn’t realistic, you may become discouraged if you don’t achieve it.
With Sam’s $5,000 credit card debt, for example, if he were to set a goal of paying it off in 20 months, he would need to pay about $300 a month. During this time, he’d pay a total of $797 in interest.
The Next Step
Once your credit card debt is paid off, consider depositing the money you were putting toward paying off the debt into a savings account so you can pay for future financial emergencies in cash, instead of charging them. Then, once you’ve built up an adequate emergency fund, consider investing a portion of the money in a retirement plan.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.
Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: www.davidlerner.com
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