Debt Guide – Step 1 – Put Your Credit Cards Away


Prerequisites

Before beginning this step you should have committed to spending some time regularly to improve your finances. You should have at least one clearly defined reason for getting out of debt (a feeling you want to have or a situation you want to be in).

Action

Take all of your credit cards out of your wallet and find a nice place in the house for them to rest. Put them somewhere out of site.

Get a debit card with no overdraft service. You want the charge to be declined if there isn’t enough money in the account. This is very important! Otherwise you may be charged lots of money for overdrawing the account. Debit cards are great because they’re just as convenient as credit cards, they leave a paper trail, and they don’t have ridiculous finance charges. When you sign up for your card or when you get it, make sure you verify that there’s no overdraft service – some banks add it automatically without you asking!

Credit Cards Are Ridiculous

If you make a $1,000 purchase on a card that has an 18% interest rate and you make the minimum payments, you will pay $1,698.35 over a period of 7.8 years before the debt goes away. You’ve paid 169% of the original cost of the item if this happens, whereas if you had waited to purchase the item, you could have bought it outright in less than 3 years! Being able to have something right away just isn’t worth paying the 69% markup in the price. Imagine they told you that price when you went in. “Oh this $1,000 new computer? Sure, no problem. Your total comes to $1,698.” Ridiculous!

Points Are (Usually) Pointless

For anyone who does not pay off their credit card balance in full every single month, rewards programs are a scam. Since you’re reading this guide, I think we can safely assume that trying to earn points is not worth the interest payments. Yes, there are some people that are able to pay off their credit cards every month to avoid interest payments and earn points, but even then it’s sometimes still not worth it. The credit card companies are there to make money. That means you lose most of the time when using a credit card. It’s not vegas; there are no “odds” that are against you. The system is made specifically so that you lose. Even if you send in a payment early, you may be charged interest on the time up until the company receives your payment (this is called residual interest).

The main reason they can be bothersome for people that can pay off their cards every month is because they’re a huge hassle – a time-suck. There’s a fair amount of verifying you have to go through to make sure you’re 1) getting the best deal, 2) not getting ripped off, and 3) that you’re using whichever card you should for the occasion at hand. If people would spend that time actually earning money or just enjoying life then their return on time invested would be higher.

Besides that, the reward-to-spend ratio is ridiculous. Assuming you want to get a free flight to somewhere with points, you’ll need about 20,000 miles. Sometimes there are bonuses, but in general you’ll have to spend at least $15,000 to get those miles. That’s a lot of purchases considering how much just buying the flight outright would cost.

Also, points expire (for no reason at all really) and points can be revoked if you miss a payment! Think you’re getting a good deal on your rewards? If your card has an annual fee, you better double check that. You may have to spend 100 times the annual fee just to break even.

So don’t do it. Once you’re completely out of debt, sure, then try it. Right now, you’re not ready yet.

When Points Are OK

Some people are very happy spending the time necessary to earn those little points. Here’s a checklist of things to verify before trying this.

  • Make sure you’ve been paying off your balance in full each month for a while.
  • Make sure you research which card will give you rewards you will actually use.
    • Compare cash back to flights. Cash back cards are usually not very rewarding.
  • Make sure you check the annual fee to see if it’s worth it.
  • Verify what happens if you miss a payment (do you lose the points you’ve earned in addition to the fee?).
  • Verify that you have automatic payments set up. If you forget to mail in a payment, you will probably be charged both interest and a late payment fee.

You’re Done When

When you’re completely done with this task you can check off the following.

  • I have no credit cards in my wallet.
  • I have a debit card in my wallet.

Extra Credit – Lower Your APRs

Call each credit card company that you have a relationship with and ask them to lower your interest rate. Sometimes they simply say “yes” without further hassle. If you don’t want to spend a lot of time on this, then don’t – it’s not the end of the world. It can be worth it if you have large balances though.

Be polite. Compare the rate on all of your cards and find out about balance transfer fees and offers. The rates from your other cards, from new credit card offers, and the balance transfer offers are your ammunition for when a representative tells you “No.

Here are some reasons to give to the customer service representative to lower your interest rate.

  • I’ve been offered card X (from a competitor) that has a lower rate and was considering switching. Can you match their offer?
  • I’ve gotten about three offers in the mail from other credit card companies with lower APRs. If you don’t lower my rate I will cancel my card and switch companies.
  • I have a lower rate with card X (from a competitor) and was considering doing a balance transfer to them. Can you match their rate?
  • I’ve been making regular on-time payments for a while now and I deserve a lower rate.
  • I’m trying to handle my debt better. Lowering the interest rate would make it easier for me to make payments because I’ve been having trouble lately.

Good luck!

Info – Make It Last

Being successful at managing your money isn’t about completely changing your life at once. The key to long term success is making little changes that compound over time. Don’t change your entire life in one month. Instead make a promise to spend a little time each week to improve your situation. Keep this in mind for Step 2.


Continue Your Journey

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