Paper or Plastic?

Written by A Guest Speaker on May 21st, 2008

Paper or Plastic?
Written by Annie Binns

No, I’m not talking about your grocery bags.

I’m talking about cash or credit, and I’m asking you to consider what your life would look like today if you had spent the last five, ten or twenty years answering that question with, “Cash, baby!” I think Ralph Waldo Emerson said it best: “Money often costs too much.”

How would you feel today if you had zero credit card debt? I’m not saying you should cut up your credit cards – in fact, having and using credit wisely is a valuable tool and having a good credit score can save you money on things from car insurance to what you pay for your house!

What I am saying is that those credit cards should be paid off monthly. And yes, by paid off that means your balance is a big fat goose-egg! There is a simple way to avoid credit card debt – and if you teach your children this technique, it will be one of the best things you can ever do for them! Consider the following decision matrix for any purchase, any amount, every time!

If you need to use your credit card to pay for your kidney transplant, I really don’t expect you to take too much time considering it! On the other hand, if you need new tires for your car, you could consider waiting until you had the cash to pay for them.

Am I preaching to the choir? You already have tons of credit card debt and are barely making those minimum payments every month? How do you get out of credit card debt without filing for bankruptcy?

Notice the phrase, “without filing for bankruptcy.” I know that for many people that really is the best choice. However, it should still be your last choice.

Honestly, there are proven ways to pay off your credit card debt. I’m going to tell you about two of them, but first I’m going to tell you what doesn’t work.

Paying your minimum balance every month does not work.

We’ve all seen the math. If you charged $5,000 at the respectable rate of 9.9% interest and make the minimum payments of 2% per month, it will take you OVER 21 YEARS to pay off that debt. Don’t make me say it again. Oh, if I must: OVER 21 YEARS!!!

That’s crazy. Say you throw in an additional $25 each month. That time frame drops to just over eight years. An extra $50 each month gets you down to FIVE YEARS to payoff.

You may be thinking if you had an extra $50 each month, you wouldn’t be in so much credit card debt to begin with. If you spend one month using the decision matrix above, I guarantee that you will find things that you don’t need to buy, and could even (dare I say it?) live quite comfortably without. Will it be $50 each month? Maybe not. The important thing is to take whatever extra you can find, wherever you can find it, and add it to your monthly payment.

The second proven method to pay off your credit card debt is with a debt-consolidation loan. This is often a good choice when you owe more than 10% of your annual income on multiple credit cards, and an even better choice if you also have a mortgage, car payment, 2.5 kids, a dog and a goldfish.

There are reputable companies whose business it is to review your credit card debt, negotiate to lower that debt, pay off your credit cards and give you one loan to pay instead. The payments will always be lower than your combined minimum payments on your credit cards (otherwise it wouldn’t make much sense!) But beware – your total payment after interest may be more than if you had paid off the credit cards directly.

This is a very competitive market and the internet makes it hard to tell the difference between the good and the bad. You should interview at least three companies before choosing the one you want to work with. Start with the following questions:

Do they require an upfront payment?
Do they require a monthly fee?
Will they pay off your debts and issue you a new loan?
What is the total cost of the loan? This disclosure is required by law.
Always ask this question: “Are there any other fees that you haven’t disclosed yet?”
Remember, if it sounds too good to be true, it probably is!

What it really takes to be debt-free are the same skills we need for all other parts of life: Patience, integrity, planning and sacrifice. And a little bit of luck doesn’t hurt, either!