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      Getting out of credit card debt

      We hear of individuals that struggle because of credit card debt. You might want to know if it is possible to avoid getting into credit card debt. We have invited David Bethel, partner, with the Financial Planners of Missouri, to discuss this topic.

      Question: We are about several problems associated with credit cards, is it even a good idea to have one?

      Answer: Yes, there are several benefits to using a credit card. If you lose cash, it is gone, but if you lose a credit card, you have little to no liability. If you are away from home and your car breaks down, you can pay to have it repaired even if they won??t accept a check. And if you use your credit card wisely you can build your credit score.

      One should seriously consider using a debit card, which works much like a credit card, but the credit limit only extends to the balance in your checking account. If a debit card is your primary card, and a credit card is only used when necessary, you will experience fewer problems.

      Question: What actions can people take to avoid getting into credit card debt?

      Answer: The first step in avoiding debt is to consistently spend less than you earn. Once you are committed to that step, it is our belief that you begin saving money in a cash flow savings account. A cash flow savings account may be the savings account that you have at your local bank along with your checking account. Most banks will allow you to automatically transfer funds from your checking to your savings account. For instance: I have my savings account take $500 out of my checking account at the beginning of each month. By building up this cash flow savings account one is able to navigate the inevitable high spending months by transferring the funds back into your checking account in order to have enough money to pay all of your bills; including the total owed on your credit cards.

      By systematically following this strategy, one builds up the habit of saving and living on less than their means. The system helps you build the habit, when you are not naturally inclined to save money. Some families tell us they do not have a problem with credit card debt then tell us that the typical balance on their credit cards at any one time is $5,000. At 20% interest per year, that is a $1,000 a year wasted.

      Question: Are there credit card traps to watch out for?

      Answer: Yes, there are probably several traps, but I want to mention four:

      -Buying something you want but don??t need. A good test is to ask yourself: ??Would I buy this if had to pay cash for it???

      -Buying something you want but haven??t saved for. The easy use of a credit card allows you to decide to buy something now and make multiple payments. The right approach is to save what would have been those payments and pay cash.

      -The seduction of the minimum payment. When you get your bill, the credit card company tells you what the amount is to pay off everything and what the minimum payment is. If you only pay the minimum, you will likely pay more in interest than the cost of the item you purchased.

      -This is an unsecure loan and comes with high interest and perhaps high fees. Credit card interest can start at 10-20 percent and if you are late or miss a payment can be much higher. Plus late fees can dramatically increase the cost of your purchase.

      Question: What can one do if they are already deep in debt?

      First, don??t make it worse by continuing to make purchases with your credit cards. Second, develop a strategy to get out of debt. Consider debt consolidation. If you have an asset like a car or home, you may be able to use the equity in that asset to pay off your credit card debt. In this situation you haven??t eliminated the debt, you have transferred it to a lower interest rate. If that isn??t an option, you will have to live with paying the credit cards off over time. Either make larger payments to the card with the smallest balance until it is paid off then transfer the payment to the card with the next smallest balance etc. Or make larger payments to the card with the highest interest rate until it is paid off, then transfer the payment to the next highest interest rate, etc.

      Financial Planners of Missouri

      110 S. Franklin St.Kirksville, MO 63501Phone (660) 956-9416Toll free (888) 418-4790Fax (877) 357-0787