If you’re struggling under a load of debt you’re certainly not alone. According to the website NerdWallet, “The average US household credit card debt stands at $16,140, counting only those households carrying debt. Based on an analysis of Federal Reserve statistics and other government data, the average household owes $7,529 on their cards…” Of course, that’s only an average meaning that many American households are carrying $20,000 or more in credit card debt.
The cold, hard truth
If you’re carrying $7,500, $10.000 or more in credit card debts and wondering how this happened it might not be your fault. You might’ve lost your job, been the victim of a serious automobile accident or had a terrible illness. But it’s probably because of your behavior or how you used your credit cards. And maybe you just didn’t bother to read the fine print in your credit card agreements so you didn’t understand what would happen if you maxed out your cards or made late payments.
The credit card trap
The credit card companies’ main goal is to keep you in debt. This is why it’s so important to understand your credit card agreements. If you use a credit card sensibly, meaning that you pay off your balance at the end of the month, you’ve had the credit card company’s money for 30 or 45 days and it hasn’t cost you a cent. But if you make just the minimum payment and roll over your balance into the next month you fall victim to compounding interest, which is what the credit card companies want.
Here’s an example of what will happen when you make just the minimum payments. If you owed $5000 on a credit card at 15% interest and made payments of $112.50 a month it would take you 266 months to be rid of your debt and would cost you $5,729.21 in interest – or more than you initially borrowed.
Where did you go wrong?
If you want to truly manage your debt the first thing you need to do is think long and hard as to what behaviors caused you to get so deeply in debt. Did you find it just too easy to pull out that little piece of plastic without considering how you’d pay back the money? Have you been maxing out one or more of your cards on a regular basis? Do you make just the minimum payments? Have you regularly been late making some or all your payments? When you’ve maxed out one of your credit cards do you just keep on using another? Do you have any idea how much those late payments are costing you?
Make a plan
If you sincerely want to get debt free you need to do two things. First, you need to change your behavior, which means putting your credit cards away in a drawer so that you won’t be tempted to continue using them. Second, you need to create a plan for managing and ultimately paying off those debts. One way to do this is by snowballing them. This is a program that was created by the financial guru Dave Ramsey. The way it works is that you list all of your debts with the one that has the lowest balance at the top down to the one with the highest.
Next, you concentrate all of your efforts on paying off that first debt while continuing to make at least the minimum payments on the others. Since that first debt has the lowest balance you should be able to pay it off fairly quickly, which will give you extra money to begin paying off the debt with the second lowest balance and so on.
For an example of how this works let’s suppose you have these debts.
• $500 medical bill ($50 payment)
• $2,500 credit card debt ($63 payment)
• $7,000 car loan ($135 payment)
• $10,000 student loan ($96 payment)
We’ll also suppose you were able to find an extra $500 a month, either by taking a part-time job or slashing your spending to the bone. You could then pay $550 a month on the medical bill (the $500 extra plus the $50 payment) so you’ll have it paid off in less than a month. When you take the $550 that’s been freed up and next attack the credit card debt you could pay $613 a month on it, plus the $63 minimum payments so will have it paid off in about four months.
Tackle the car debt next. You will be able to pay $748 a month on it so that in 10 months it will be over and done with. Lastly is the student loan debt. You can now put $844 a month on it so it will be gone in a year.
That’s the power of snowballing
If you need help
If you feel you couldn’t do debt management yourself you could go to a consumer credit counseling agency for help. The counselor you’re assigned will help you develop a debt management plan (DMP) then convert it into a proposal that will be sent to your creditors. If they accept your plan you won’t have to pay them anymore. Instead, you will send a check a month to the consumer credit counseling agency and it will distribute the requisite funds to your creditors.
One of the most important things about consumer credit counseling is that it will force you to change your behavior because you’ll be required to close all of your credit accounts. And you’ll be seriously encouraged to not take on any new debts until you complete your DMP, which will likely take four to five years. But if you stick to your plan you’ll have learned new behaviors that will help you stay out of debt. Plus when you complete it you will be totally debt-free. And how great would that feel?