How about a 10, 20, or even 30% return on your investment? Unthinkable, you say? Your credit card corporation has been carrying out this same action for a long time.
The amount of debt Americans owe is thought to be 972 billion dollars, or $972,000,000,000. What a large number of zeros!
How did we, as a country, get here?
772 billion in 2007
555 billion in 1997
169 billion in 1987
77 to 39 billion
(Source Federal Reserve)
With a 2008 typical US family income of $43,200, credit card debt for the average American was between 5 and 12% of their annual income. (Source: Federal Reserve). Remember that you don’t get to keep all $43,200; a portion goes to the federal government, followed by your state income tax and sales tax, which can range from 0-9% of your after-tax income.
Here are a few typical situations that we encounter today:
With a $125 monthly payment and a $5,000 balance with a 16% APR, it would take 4.8 years and $2,000 in interest to pay off the balance.
It would take almost seven years and $5,800 in interest to pay off the debt with the same balance and payment at a 25% APR.
It would take four years and $966 in interest to pay off the debt with the same balance, payment, and low APR of 9%.
This presumes you pay all future invoices in cash and never purchase another credit card. Additionally, this presupposes you don’t miss a payment or accrue late fees.
Keep in mind that this debt is only $5,000. You probably know people who owe at least twice as much as that. You should put $125 into your retirement account for every $125 you pay toward your credit card debt. Generally speaking, your money doubles every 12 years at a return of just 6%. It is referred to as the rule of 72. Your money will typically double in value after 72 years, the number of years you divide the rate of return by. The best part is that investing this money in a 401k or IRA grows tax-free. Do the arithmetic for a few minutes. Are you beginning to understand how crucial it is to remain debt-free?
Are credit card providers the bad guys? In no way. Credit cards can be an excellent financial tool if utilized wisely.
Let’s establish some guidelines for utilizing your credit card and see how we may benefit from them.
1) Check whether you will be rewarded for your purchase or reject the offer. I discovered Lowes had a “we’ll beat any competitor by 10%” policy when I went to buy carpet. I presented a Home Depot quote and applied for a Lowes card for a 10% discount. I got six months to pay off my item interest-free and saved over $400 through shopping. Yes, I spent more than 4 hours driving to 5 different stores. I did, however, earn $400 for my 4-hour shift!
2) If you are wise and responsible, you should never spend cash on anything. That advice won’t be found anyplace. Take the $200 you just spent on food as an example. You grab a debit card or some cash when you should be reaching for your Discover card, which offers 5% off of grocery purchases. Lacking a Discover card? Consider receiving some free airline miles by utilizing a frequent flyer credit card. Using your rewards card and making annual savings of 5% will get you $120 or 2400 miles toward a free trip. You won’t get anything if you pay with cash or a debit card.
3) Avoid paying late fees. If your schedule is hectic, pay your credit card statement as soon as you receive it or plan payments using your online bank account. Pay online at least ten days in advance and get a confirmation that you have delivered in full.
4) What should I do if I’m already in debt and in trouble? I’m happy you asked. Everything is negotiable, even your interest rate. Look up 0% balance transfer offers online. Not every 0% balance transfer promotion is made equal. The majority of offers include a balance transfer fee. Before you open a new account or complete the balance transfer, you must enquire about the terms and conditions. The days of being caught off guard or seeing fees on your bill you don’t understand are over because you’ll be financially savvy. Before you do anything, you know what you are getting into. Finding a company to provide you with a card may be difficult if your credit score is poor. Call the company that issued your present credit card and haggle about the interest rate.
I’ve witnessed my 0% interest rate extended for six months when I threatened to cancel. In another instance, I threatened to delete my account again and had my $60 yearly charge cut to ZERO. In this instance, I made $60 in 10 minutes. Your credit card company may also cancel your late fees if you don’t make many late payments. You must be the one to take the initiative, place the call, and request it. Tell them you want to close your account if they say no. The “save team” will typically miraculously locate you at a better rate or better terms. When you inquire, be polite yet forceful. If you get a no, hang up and try calling again. Not every agent will fight for you in the same way.
Your credit card company spent a lot of money to win your business. Understanding that most companies do not want to lose you as a client is crucial.
I hope this has provided you with some understanding of where our country is and how you, as an individual, may help with your investing and saving situation.
The editor of the personal finance-focused social networking site InvestorZoo.com is Larry Lane.
The editor of the social networking site [http://www.InvestorZoo.com], which focuses on personal finance, is Larry Lane.
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