Do you have the latest Aerogold Infinte Visa card in your wallet? Or perhaps you might be holding the MBNA Smart Cash cash back rewards Mastercard. If you’re really a high class spender you might even have the American Express Platinum or Black card. Most individuals probably have more than one credit card in their wallet. Some cards might even have annual fees because of extra perks that might come with having one. To some people, the credit card is a status symbol. It’s almost like saying, “Whoa! That person has a gold card. That person must be rich”. The fact is, many of us have easy access to credit. This makes it really easy for us to spend on things that we might otherwise not buy if we only had cash in our wallets to spend.
If we think about what credit really is, does it really mean you are rich if you have a gold card? That person might actually be “living it up”, so to speak, on borrowed time. Living off credit is a road to disaster. Living on a credit card is worse. Most people don’t realize just how much it costs to leave an unpaid balance on their credit card. Most credit cards carry a 20% interest rate on any outstanding balance. A credit card will generally give you a grace period from the time of your purchase to when the outstanding balance actually has to get paid, but if the payment is missed the interest will start to accrue on the date of your purchase, not the due date.
The fact that 20% is an absurd interest rates on a loan is absolutely correct. It’s why banks do so well when people are delinquent on their payments, or if individuals only decide to do minimum payments. Things that you thought you need, only ends up costing you more in the long run if your credit cards are not paid off. As someone who wants to be financially prudent, having credit card debt is the worse thing you can possibility have. If you need to live off credit cards, then you need to stop. Get out the scissors and cut all of your cards right now. Living on credit is a lie to yourself. It will only lead you to financial ruin.
If you have bad credit card debt, it’s important to get rid of it as soon as possible. The first thing is to stop spending on your cards. Cut them up and don’t call for replacements. This will force you to save before you spend. The second is to budget for paying off past loans so that it is reasonable. You shouldn’t only pay your minimum balance, because you will never pay it off that way, but you also can’t skip out on the necessities like food, shelter and utilities. It’s a harsh reality that perhaps you won’t be able to afford the luxuries in life, but it is better to pay the price now, than later when drastic measures like bankruptcy come into play.
One thing to do in order to reduce the heavy interest payments is to see if your financial institution can issue you a line of credit with a much lower interest rate. This will reduce the interest burden on credit card debt because personal line of credits can be had at prime plus 3 to 5 percentage points. With the low interest environment that we currently enjoy right now, you will end up paying a significantly lower interest rate. The goal of moving your credit card debt to a line of credit is not to free up your balance on your cards so that you can use them again. Remember you need to cut up your cards. The lower interest rate means that the outstanding principal can be paid off faster, as more of every payment will towards the debt than the interest payments.
If you own a home, the other possibility is to roll it into your mortgage. This practice, however, is something that I absolutely do not like. The reason is that the majority of people’s net worth is generally locked up in the only asset that they own. Their home. By using the value of your home as an ATM essentially defeats the purpose of owning one in the first place. Owning a home is a way to save money, not to use it as collateral for all the other things that you buy in your life. Most people will use their home as a means of forced savings for their retirement. What else will people retire on if they use up all the equity in their homes? Remember that regardless of how high home prices go, the outstanding mortgage still needs to be paid after selling it. Reducing the equity in your home only prolongs when the mortgage is paid off, and ultimately the amount of interest being paid will never be abated. People who rely on the windfall from selling their home when they retire will be in for a rude awakening if they fail to realize that they’ve been using their equity in their homes to pay for things they want. This is why I am totally against using home equity for debt repayment.
I want to stress vehemently that credit cards are there for convenience. It’s a way to help pay for things without carrying around wads of cash in your wallet. A credit card is not an asset, it’s a liability and it should be treated as such. If you know you can’t pay off the balance, don’t buy it. Anything you buy on a credit, must and should be paid off whenever the balance is due. Never, ever leave an outstanding balance on a credit card. If these are things that you can’t do or can’t control, then perhaps it’s something that shouldn’t be in your wallet at all.