How to prevent debt, particularly credit card debt, has emerged as a significant problem in the lives of the majority of people. What do we do now that we’ve learned in recent years that there won’t always be someone to save us if everything goes wrong?
We’ll examine how to manage credit card debt in this article. We’ll look at why people appear to rack up a lot of credit card debt first, how much this ostensibly free money costs us, and then some strategies for reducing credit card debt afterward.
Why do individuals keep piling on more credit card debt?
Isn’t having to carry cash around a considerable pain? When you go shopping, you discover that, for just a few dollars extra, you may purchase something else that you believe you will eventually need. What will you do if you have enough money to pay for the item you set out to buy?
Did anything there ring a bell? Credit card firms are aware of the fact that you are not alone if it did.
Instant gratification is now available and, for the most part, expected in our day and age. In the past, if you found something else that would fit incredibly well with what you already had, you had to save even more to buy it. Yet during the past few decades, everything has altered.
Consumers increasingly utilize credit cards for the majority of their transactions and are continually astonished when the amount owing on the credit card creeps up. This is partly due to how simple it is to use a credit card and the fact that we don’t think of adding money to a credit card as actually paying someone. If you were physically handing over cash instead of a piece of plastic, would you spend as carelessly?
What is the actual cost of this debt to us?
Most consumers are unaware that their monthly credit card debt is slowly decreasing. Most of your monthly payment goes to credit card issuers to cover interest payments first. This implies that if you only pay the minimum amount due on your bill, you will have only paid back a small portion of the money you initially put on the card within a few months.
We’ll use a modest $2000 credit card balance with an APR of 17.9% and a minimum payback of 2% or $5 if it’s the smaller of the two as an example of only paying the minimum each month. According to those calculations, it would take 35 years and two months to pay off your $2000 debt, costing you $4,091 in interest alone—just slightly more than twice the original balance on the card.
Nevertheless, all that presumes you don’t keep using the card when you shop.
Most credit card issuers require you to pay off any outstanding balance on the card first if you receive an offer to transfer a balance to that account. That means that the meager rate you received upon sharing might not matter to you if you don’t start paying it back before the lower rate expires, and you have to pay back at the higher rate.
Are you aware of the interest rate you’re paying the credit card company? The amount of money you might be returning to one card company vs. another can vary significantly.
So, how do we prevent credit card debt?
Although cutting them apart would be the most straightforward approach, most people won’t go that far, so let’s look at other options.
First, only charge amounts on your credit card that you can afford to pay off by the end of the month. Because interest is not immediately applied when you make a purchase, if you can repay the loan before it is due, you will have avoided paying any additional fees and been able to acquire the items you require.
The next step would be to consider utilizing the money you’ve “saved” to pay off your debts. For simplification, let’s assume that while you have $1,000 in savings generating a fantastic 10% interest, you also owe $1,000 at 20% on a credit card. You would accumulate $100 in savings over a year, pay $200 in interest to the credit card company, and ultimately lose $100. You can instantly save $100 if you take the money from your savings and pay off the credit card. If you weren’t going to be able to pay it back within a year, you could save much more.
Loan consolidations always seem like a smart move, but are they? Although the interest rate will be reduced, it can be for a set period. Paying two to three months’ interest to get out of some of these loans is frequently required. Consider considering what would happen to the credit card debt if you paid the loan on that rather than a loan if you plan to repay it more quickly.
Always carefully consider your options.
What have we discovered about avoiding credit card debt, then? First, though it’s not always feasible, cutting up all of your credit cards is an excellent place to start. If you have to spend money on them, attempt to limit your spending to amounts you can pay back in a month. The ideal repayment method if you must overspend is to use as much of your savings as necessary. Never pay back only the minimum, and always know your interest rates.
If you take this advice to heart, it should be much simpler to avoid credit card debt.
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