SALARIES / FEB. 12, 2014
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Gaining the Financial Leverage to Pay Off Credit Cards

It’s amazing how something so typical can also be so destructive. It’s a pretty normal thing to have a credit card if you are an American. In fact, the average person generally has two, which is a recent decline. And the average balance on a credit card is nearly $5000 per person. Credit card debt of course excludes a home mortgage, one or more car loans, and student loans.
  
When the average household headed by two young college grads with four-year degrees has a total of 53,000 in student debt alone, it shouldn’t be any great surprise that 76 percent of Americans are living paycheck to paycheck. Anyone who is in that situation is well aware of the daily stress that comes with that. With that much outstanding student loan debt, it can leave a person feeling defeated and wondering why credit card debt even matters in their overall financial situation, but it does.

Consider this: $5000 dollar credit card balances certainly complicate matters because they’re another bill that has to be paid and generally, there is nothing of lasting value to show for it. The interest alone that is racked up, (which gets tacked on to every minimum payment) means that a person is paying multiple times over for the items that they charged, if the balance is outstanding for months or years. That’s money that is eating into income that could be better used to build wealth and improve a person’s standard of living.
  
The first step in getting things under control is to set up a budget. Now this may seem ludicrous when a person already knows that they don’t have enough money to make the ends meet. But the point in setting up a budget is to establish a level of priority, that will not only keep their household functioning, but will also be helpful in determining the order in which things need to be paid, and which ones can be ignored for a while. By the way, a good budget includes putting some money into a savings account – even if that means some severely past-due credit cards are going to have to be temporarily ignored.
 
Financial planner and author Dave Ramsey encourages people to stay basic in terms of keeping the household functioning. Food, shelter, and transportation need to be top priorities, not the bill collector that is able to exert the most emotional pressure. An emergency fund with $1000 in it is also an important piece of the puzzle in beginning to break the debt cycle. And it may take several weeks before a person gets there. 

Cutting up credit cards is also an important element of exercising the self-control to stop using them. Now that can seem scary because a lot of people like to have a credit card for “emergency purposes,” but that’s backward. A savings account is what a person is supposed to have for emergency purposes. That’s the point of the $1000 emergency fund. And for every credit card that gets paid off, a person has more money to put toward their other bills and into their savings account. Ultimately, a savings account should have 6 months to 1 year of stored up income in it, but that’s more long-term, because it’s easier to fill a savings account once there is less debt hanging over your head. 

Generally, the best plan of action for attacking the credit card debt is to start paying down the smallest balance first. While that might not mean the lowest interest rate, paying off the smallest balance first gives a person a sense of accomplishment and encouragement that keeps them going so that the bigger balances lose the power to remain overwhelming. Dave Ramsey has an entire program called Financial Peace University that gives the extensive details that belong with the above thumbnail sketch.
 
Though Financial planner Larry Burkett is no longer alive, his book entitled The World’s Easiest Guide to Finances is as useful today as it was when it originally came out several years ago. The principle of taking what a person presently has and “telling it where to go” via a budget still applies. 

Another great resource that addresses budgeting, freedom from debt, and once that’s successfully accomplished, investing, is Fixing the Money Thing, by Gary Keesee.

While this short article is hardly exhaustive in regard to getting free of credit card debt, the suggestions and recommended tools should be useful, and even bring some hope that gaining some financial freedom is something that is attainable. 

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