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If you have credit card debt, congratulations. You are on your way to investing. Yes, really. You probably shouldn't be investing beyond your 401(k) or a Roth IRA, yet, but your credit card debt can be a blessing in disguise. Here's how. To pay off that debt, you will need to discipline yourself and start making maximum monthly payments. That will require some lifestyle adjustments. Then, when the debt is paid off, KEEP MAKING THOSE PAYMENTS. But make them to yourself instead -- straight into your brokerage account. First things first, though. Get out of the plastic prison.
Here are some tips to help. More can be found at the Fool's Getting Out of Debt area.
- Pay less. If your annual interest rate is more than 12%, try to negotiate a lower rate. If you have a good credit history and can effectively threaten to switch your account to another card, it's surprisingly easy. Next step: Consolidate your outstanding balances to the card with the lowest interest rate.
Tip: Be sure to check if the credit card company charges a fee for "balance transfers." How does that fee compare with what you will save by lowering your interest rate? Make sure the trade-off is worth it. Many cards will waive this fee for new customers moving a balance from another card. Ask. (Note: Balance transfers are not for the purpose of giving you a higher "available balance" for purchases. This is solely a way to cut interest while paying DOWN debt.)
- Stop going into debt. Pay attention to the card. Strangely, many people make great efforts to pay off one card while overcharging on another. Mistake. Or they charge casual purchases on a card with a high balance. Most cards only give you a grace period on new purchases if the previous month was paid in full. If not, you pay interest on new purchases from the day the charge hits your account.
Tip: Make new purchases on a card with NO outstanding balance (or pay cash) and only charge what you can afford to pay off entirely that month.
- Forget the concept of a minimum payment. Minimum payments are designed to keep you enslaved to the credit card companies. Think in terms of a maximum payment -- the most you can possibly scrape together. Or set a date to be debt-free and design your payments to reach that goal.
Tip: To determine the amount you need to pay your credit card companies each month, your payments must cover 1) all new purchases (on a separate card, remember), 2) all interest charges, and 3) a fixed percentage of your balance. (See next tip.)
- Make a plan. To determine the fixed amount that needs to go toward your balance each month, divide your outstanding balance by the number of months over which you plan to pay off that balance.
Tip: If you want to be debt-free in 18 months, divide your balance by 18 and pay that plus the interest accrued and any new purchases every month for 18 months.
You are now on the road to eliminating credit card debt! Stay the course.
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