If you were given the choice between paying $100 or $500 for the same pair of shoes, you'd probably pick the lower price. But if you pay with a credit card -- and only make minimum payments each month -- you may as well have selected the $500 shoes.
Sky-high interest rates are just one reason you need to get out of debt. Over time, debt can also lead to a lower credit score, take a toll on your financial confidence and seriously decrease your disposable income. The consequences? You could get turned down for loans, be unable to take a much needed vacation, or even not have enough money set aside for an emergency.
Fortunately, there are steps you can take to quickly pay down debt and regain confidence in your finances. The first step is to stop ignoring those high interest rates and lingering loans. "Becoming truly savvy about your money means understanding how debt fits into your overall finances and long-term goals," says Julie Curran, District Executive with Harris N.A.
Debt can be incurred from several sources, including credit cards and mortgage, auto, student and personal loans. Curran recommends tackling your credit card debt first -- it's likely your debt with the highest interest rates and is more likely to negatively affect your credit score. Take the following steps to kick your debt to the curb:
• Stop creating more debt. A recent analysis of credit card use by TransUnion®, a Chicago-based national credit reporting agency, found that the average consumer credit card balance stands at just under $5,000. If you're like many people, you probably use your credit cards to make everyday purchases. But to start reducing debt, you need to put your credit cards away. Even small purchases add up and if you don't pay off your balance in full every month, you could end up paying thousands of dollars extra for these necessities. Instead, wouldn't it be nice to save more of your money for vacations, a new car or a rainy day fund?
Instead of using credit, try paying for everything with cash or a debit card. If you need help creating a budget that keeps you in the black, read Budgeting in Uncertain Times.
• Talk to a financial professional. Facing debt can be an emotional task, but getting unbiased advice can help. A Harris banker can help you review your situation and create a priority payoff plan based on which debt has the highest interest rate. As your debt begins to shrink, consider using the cash you've freed up to start an emergency savings fund so you can break the cycle of using your credit card when unexpected expenses pop up.
• Pay more than the minimum payment.It may not seem like much, however paying just $25 more toward your debt each month can make a huge difference in the amount of interest you'll pay over time. Consider the following example:
- By increasing your monthly payments by just a small amount, you'll pay down your debt faster and significantly reduce the amount you'll pay in interest. You'll also free up your available credit, which can improve your credit score.
- By boosting your credit score, you'll become eligible for better interest rates on loans, helping you save even more in the long run.
• Consolidate your debt.The interest rate for most credit cards hovers between 15 and 18 percent. Now compare that with the 4 percent interest rate many home equity lines of credit offer. Consolidating your credit card debt into a home equity line of credit could save you up to 14 percent in interest, plus you'll have the added convenience of making only one monthly payment, instead of paying several bills each month.
With careful planning, you can take control of your debt and save yourself thousands of dollars. At Harris, we'll help you find the right strategy for your individual situation. "We want to help you become smarter and more confident about managing your finances," says Curran
Learn about other Helpful Steps such as planning for the unexpected, saving money automaticaly or tracking and managing your money at HelpingMakeMoneyMakeSense.com.
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