Tag Archives: Credit Cards

Debt is Bad

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If you make the monthly minimum payment on your 14% interest rate credit card balance, it will take 25 years to payoff this debt and you will pay in interest charges more than the original amount.

You should always pay more than the minimum payment due on your credit cards, student loans and other consumer debt. As your credit card debt balance decreases, your minimum payment due will decrease and your payments will stretch out. If you make the monthly minimum payment on your 14% interest rate credit card balance, it will take 25 years to payoff this debt and you will pay in interest charges more than the original amount.

There are amazing benefits to climbing out of credit card and student loan debt. Paying off debt takes a plan and patience to execute it.

  1. Figure out how much debt you owe. You cannot make a plan to pay off your debt until you know exactly how much you owe.
  2. Decide what to payoff first. Best option is to pay all the minimums, but pay more money on the card with the highest APR. The “snowball” method is the most efficient approach. It’s essential for you to get started.
  3. Negotiate down the APR. call the credit card company and ask for a lower APR. if successful, you can save a significant amount of money.
  4. Decide where the money to pay off your credit card will come from, like balance transfer (a band aid for a larger problem, your spending habits), 401(k) or home equity one of credit (HELOC), or reducing spending to prioritize debt reduction.
  5. Get started. The goal is action, not paralysis by analysis. Get started executing your plan and you can always find tune it later.

Being in debt means giving up choices and having reduced options; it means staying at a job you hate because it pays good money; it means not being able to build a decent savings account. It means delaying or foregoing implementing your plan to achieve financial freedom.

“Good debt is a powerful tool. But bad debt can kill you.” ~ Robert Kiyosaki

Debt can be a tool, as long as it is used to buy assets. And, statistically speaking, debt in America is normal. Only 50 percent of households reported any credit card debt, while credit card companies reported that 76 percent of households owed them money,” wrote Binyamin Appelbaum of the NYT

Seventy-five percent of Americans claim that they don’t make major purchases on their credit cards unless they can pay it off when the balance is due. Yet when looking at data of actual spending behavior, over seventy percent (70%) of Americans carry a balance.

It appears most people have no idea how much they actually owe or have any idea what their debt payoff date is.

Most people don’t get into serious credit card debt overnight. Instead, they accumulate debt little by little overtime until they realize they’ve got a serious debt problem.

Getting rid of credit card and student loan debts is hard, but very necessary to build wealth and achieve financial freedom.

Without a debt management plan, that requires knowing both the amount of debt you owe and the projected payoff date, you will more than likely be controlled by your debts.

The good news is that credit card and student loan debts are almost always manageable if you have a plan and take discipline steps to control and reduce it. You have to plan and take action paying off you credit card and student loan debts.

The number one mistake people make with their credit cards is carry a balance, or not paying it off every month. Since the key to utilizing credit cards effectively is to pay off the balance in full every month.

It is difficult for someone to achieve financial freedom if they always owe and have excessive debt.

Use credit only to purchase things of lasting value: a home, an education, maybe a car. Pay cash for everything else. To quote Knight Kiplinger, “Do you know anyone who got into big financial trouble because they didn’t borrow enough money?”

Once you’re out of the debt hole, you can avoid that predicament again, explains bankrate.com. Here are some rules to live by:

  • Set a budget and stick to it. Live within your means.
  • Avoid impulse purchases.
  • Shop around for the lowest price before making a big purchase.
  • If you use a credit card, pay off the balance each month to avoid interest charges.
  • Keep your finances organized and keep a close eye on your bank balances.
  • Stay away from “buy now, pay later” and “interest-free financing” offers, which just defer your debt.
  • Save money. Try to set aside a certain percentage of your income to be swept into savings.

References:

  1. https://www.bankrate.com/personal-finance/debt/debt-consolidation-options/

Five Money Goals to Financial Wellness | TIAA

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According to TIAA, there are five big financial goals anyone seeking financial well-being should include on their list:

  1. Max out your 401(k) / 403(b). One rule of thumb says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40. And, it’s essential to take full advantage of your employer match, if you have one: With a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 (free money) each year! Letting your employer match go to waste would be like you accepting a $3,000 pay cut without a fight. In the absence of an employer plan, contribute to an IRA instead, even though the target is much lower (the annual contribution rate for 2021 is $7,000.
  2. Build an emergency fund. Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. Once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.
  3. Get your financial affairs in order. Estate planning is something you can’t afford to ignore. Getting your financial affairs in order, and designating the right people to manage them in the event of your incapacity or death, takes a huge weight off your shoulders. Necessary documents include durable powers of attorney, which designate someone to manage your day-to-day affairs, and a living will or healthcare directive to instruct your doctor what to do if you’re unable to make medical decisions for yourself. Don’t forget to inform those assigned with the task of handling your estate, who need to know the location of your will and other estate planning documents.
  4. Give yourself a debt deadline. Bad debts. You know which ones they are: the loan you took out to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a New York subway car. Convincing yourself that minimum monthly payments are okay? How about setting a deadline for repayment and getting rid of this exponentially growing interest?
  5. Create a budget (and stick to it). If you find that your spending is a bit out of control, you may want to press the reset button on your out-of-control spending behavior with a budget.

Setting these five money goals is enough to start you well on your way toward financial well-being.

References:

  1. https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals

True Cost of Credit Cards

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Credit cards make buying things easy, but at a significant cost

Credit cards provide security, convenience, and even rewards based on spending. However, if cardholders don’t manage their cards carefully, they may find themselves facing unwanted consequences like a poor credit score or hidden fees.

If you don’t pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.

Pros and Cons of Credit Cards

To make the most of your credit cards and maintain a great credit score, it’s essential to understand their pros and cons. Maximize the benefits and minimize unnecessary costs by learning about the advantages and disadvantages of credit.

Advantages

  • Instant Purchasing Power – Credit can help with unexpected emergency expenses and give you the flexibility to pay them over time.
  • Security – Lose cash, and it’s gone. Lose a credit card, and it can be canceled with no harm done in most circumstances. Also, you need to be prompt about reporting a lost or stolen card to be protected against its unauthorized use.
  • Record Keeping – Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.
  • Convenience – Credit cards are more widely accepted as a form of payment than checks, and they’re generally faster to use.
  • Bill Consolidation – Bills can be paid automatically via credit card, consolidating several payments into a single sum.
  • Rewards – Using a credit card with a rewards program may earn you benefits like free travel.

Disadvantages

  • The main disadvantage to credit card usage is the potential cost in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it is due each month.

It’s important to understand the true cost of credit cards when interest and fees are factored in. Using credit may be less convenient if it means paying more for purchases over time when interest is factored in.

Payment by credit card is quite different from the cash payment methods like cash, check, or debit card. With credit, a promise to pay later is a part of the transaction. With credit cards, credit is provided by a third party (someone other than the seller), the seller receives full payment for the item. The seller must pay money back to the third party who provided the credit. In this way, the person receiving the credit is delaying payment.

Many people use credit to pay for meals at restaurants, even to make small purchases without having to use cash. Because the use of credit is so common, it might appear that credit is unlimited. However, people who do obtain credit are subject to credit limits, meaning that they can only get so much credit.

Get to know these credit cards terms:

  1. Annual Fee – The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees.
  2. Annual Percentage Rate (APR) – The yearly interest rate charged on outstanding credit card balances.
  3. Balance – An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to the amount of money owed.
  4. Credit Line – The maximum dollar amount that can be charged on a specific credit card account.
  5. Grace Period – The period of time after a payment deadline when the borrower can pay back the borrowed money without incurring interest or a late fee.
  6. Introductory Rate – An interest rate offered by credit card issuers in the initial stages of a loan. These rates are often set much lower than standard rates in order to attract new cardholders. Make sure you know how long the introductory rate will last and what the standard interest rate will be once the introductory period ends.
  7. Minimum Payment – The minimum amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.
  8. Overdraft Protection – A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Credit cards can be a convenient and flexible form of payment, but they have to be used responsibly in order to make the most of your money. Though credit cards allow you to purchase items instantly without using cash, it’s important to use your cards as carefully as you would handle your cash.

References:

  1. https://www.practicalmoneyskills.com/learn/credit/credit_basics
  2. https://www.econedlink.org/resources/the-costs-of-credit
  3. https://www.thebalance.com/the-true-cost-of-credit-cards-1289627
  4. https://www.practicalmoneyskills.com/learn