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Debt Hangover
Holiday fun can easily lead to overspending.
Phil Dyer, CFP, offers three tips to help control credit card
debt before it gets out of hand — just in time for post-holiday
bills.
Did you run short of money to cover your holiday expenses? Maybe
you did what many Americans do — charged it! Increasingly, American
consumers of all ages are eschewing cash for the convenience and
protection of credit cards, especially during the holidays. The
explosion of credit card reward and affinity programs, with
everything from air miles and point-of-sale discounts to cash
rewards, has enticed many consumers to carry more credit cards than
ever before — and carry higher balances along with them.
According to www.cardweb.com, a
leading online information provider about credit card programs, half
of all U.S. consumers carry a balance on their credit cards, with an
average of $9,312 a household. This represents a doubling of credit
card debt in the past decade, meaning potential trouble for
consumers. Two recent changes in the law — making filing Chapter 7
personal bankruptcy much more difficult and requiring credit card
issuers to double the minimum monthly payments from 2 percent to 4
percent — combine to make life difficult for consumers struggling
with high debt levels.
If you spent more than your limit during the holidays and are facing
big credit card bills, try following these three steps:
- Start using cash or a debit card. Studies of consumer spending
habits show that those using credit cards spend 15 percent to 20
percent more than those who pay with cash, debit cards, or checks.
Consider putting away credit cards and just using cash until
balances are paid off. Not only will you spend less, but also you
won’t be paying big interest charges. And debit cards now offer the
same fraud protection as credit cards if lost or stolen.
- Pay more than the minimum. The average interest rate for both
fixed and variable credit cards is approximately 13 percent. This
number will continue to increase as short-term interest rates go up.
Making small extra payments can make a huge difference. If an
interest rate is 18 percent, paying only $25 more a month than
required will reduce the payoff time on a balance of $5,000 from
more than 30 years to five years and two months, saving a whopping
$9,863 in interest charges.
- Watch your rates. Make sure you check your statement each month so
you know what your rate is. If you’re not satisfied, contact the
card issuer and request a lower rate. It costs a card issuer
anywhere from $50 to $150 to land a new customer, so many will lower
the rate substantially if you threaten to take your business
elsewhere.
Credit cards can be great financial resources. Just remember to be
cautious of too much of a good thing!
Go Online for Financial Assistance
- MOAA has several calculators to help you determine your debt
and how to pay it off. Visit our Web Base,
www.moaa.org, and click on
Financial Center
(under Services) to use this members-only resource.
— Former Army Capt. Phil Dyer, CFP, is deputy director
for financial education, Benefits Information. For financial advice,
members can contact Garrett Planning Network at (866) MOAA-GPN
(662-2476) or
www.garrettplanning.com.
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