In the third installment of the sacred Financial Commandments, we talk about the biggest thing to avoid. This is in contrast to the more proactive Financial Commandment we mentioned previously, Pay Yourself First. Just like a winning football team needs a good offense along with a good defense, a great financial plan needs to proactively go out there and make you more money, while at the same time preventing big money blunders from ever happening. Commandment #3 is to avoid one of the biggest financial holes you can get yourself into: credit card debt.
It is known that not ALL debt is bad. Student loans can help you get an education which you can hopefully leverage into greater income potential for the rest of your life. A home mortgage will allow you to own a home that hopefully appreciates in value when you sell. If not at least it gives a roof over your head. A car loan, though tied to a product which will almost always depreciate in value, lets you drive a car, which you can use to get to work or wherever you would like to go. These types of debt are not always the best to get into, but AT LEAST you have something of potential value to show for it. This is known as leverage, as you can use your debt to potentially multiply your money in the future. Interest rates on these types of loans are usually pretty manageable as well.
Credit card debt is a whole other story. You almost never have any leverage buying consumer goods with your card (unless you can find a black market for Snuggies). So the chance of you making some money off of your debt is not very good. Credit card interest rates are also very high compared to most other forms of debt, ranging from anywhere around 10 to 30%! If you have a revolving balance, meaning you don’t pay off your balance in full and always have some debt incurring interest, you are really getting hosed. You are probably paying a very high amount in interest payments, payments that were easily avoidable and with money that could be used for much better purposes.
If you do find yourself in deep credit card debt, start praying to your Lord of choice for help. When you’re done, it’s really time to buckle down and pay off the debt. Another reason credit card debt is so dangerous is that it’s so easy to accumulate. Credit cards are widely available and banks love giving them out because they are a very profitable item for them. So if you do find yourself in debt, the absolute first step is to stop using the cards! Sounds simple enough but it can be hard to implement for some people.
After forbidding yourself from using your cards for a while, a credit card repayment plan is very simple: Use cash only, pay the minimum on all of your balances, and pay whatever you can on your balance with the highest interest rate. Once that balance is gone, move to the next highest interest rate. Rinse, lather and repeat. This is the most efficient way to pay back your debt, despite what those “credit counseling” companies say. They will essentially set up a similar plan for you, and charge you for it. Bypass the middle man and follow the formula above to pay off credit cards quickly.