Behavioral economist Meir
Statman, recently said "getting out of debt is the
financial equivalent of
trying to quit smoking."
Just like any bad habit, good intentions alone will not
be enough. To ensure success, we need to break our
underlying patterns of behavior. How is it we live in
the richest most powerful country in the world, but the
average American is more than $11,000 in debt. Our
European friends who live by a mainly debit card system
have an average savings of $13,000. On a recent visit to
Germany, I was shocked to find that less than 35% of all
the shops and restaurants accepted credit cards. What
would we need to do to reverse this trend and get into a
(plus) situation?
Plastic Surgery
If we are serious about paying off our balances. We
don't have to literally cut up our credit cards, just
stop using them routinely. We should go green for our
everyday spending. Try carrying around a set amount of
cash to use each week. We make better purchasing
decisions when we actually have to hand over the green
stuff plus there's a preset spending limit. When we run
out of money, we stop spending it's that simple. When
the only way to purchase is plastic, buying online for
instance, then use your debit card. Your debit card can
also be used as an emergency substitute for cash should
you run out.
Leave Those Cards At Home
The best way to ensure that you enforce the cooling
off period on new credit purchases is by taking the
cards out of your wallet. You should store them in a
place that's not easily accessible and safe. Do not let
others know where you have hidden them.
Close The Accounts No Longer Needed
Having unused credit available from lenders with whom
you've had a long relationship will help boost your
credit score. Having too many will harm your credit
score. As a rule, 3 credit cards is what works best and
try to never spend more than 50% of the available credit
on any of the cards. This will keep your score at it's
highest. You should also consider closing all your store
cards, if you need to make a purchase then use your
credit card and pay it off at the end of the month.
Lowering Your Interest Rates
Start by reducing what you pay in interest. We can
start by calling our current credit card companies and
explaining that we intend to transfer our balance to
another issuer unless our interest rate is lowered.
Almost all credit card companies run promotional
programs with low or 0% interest. They will be willing
to put you on one of those rather than risk losing your
business. All you need to do is ASK.
Tackling Those Credit Card Balances
Finally we need to develop a strategy for paying off
our existing credit card balances.
Gather all your credit card statements together and
make a simple table listing the entire amount you owe,
and the minimum payment and interest rate for each card.
This will help us determine the order in which we should
pay off our cards. We need to focus on the highest
interest rate cards first and pay off as much as you can
each month while making only the minimum payments on our
other cards. When the first card is paid off, use the
same strategy on the next-highest interest rate card and
so on until you're debt-free.
Late Payments
Are the number one cardinal sin of debt management.
You get hit with hefty late fees and very high penalty
rates that can go to 30%, plus of course your credit
score will take a big hit.
We all have a responsibility to improve our financial
literacy and develop the required skills and practices
for effective financial management. There is a real need
to get away from the "Someday things will get
better in my life" or the "Someday I
will be able to earn enough money to stop worrying about
the bills". There is a lot more to life than
that, but it has to be said and understood that the only
person that can change your life is YOU. There is NO
substitute for Action! With Action, you will overcome
your fears and hesitations and accomplish everything you
set out to do and more.
