Banks have no interest in you paying off your credit card debt fast. They make a sizeable proportion of their profits from the interest payments made on credit card debt. It is in their interest for you to take as long as possible to pay back what you owe. The average credit card account balance was $3,333 in November 2011. (Source: Reserve Bank of Australia, January 2012) Today I was going to present a lot of current information about what the state of credit card debt is in several countries but now I think that is the wrong way to go about encouraging you to start getting serious about paying off your debt. Seeing a lot of statistics can confuse some people and it angers others. There are some who have become comfortable with credit card debt and believe it to be part of modern life; I am not one of those people. I believe there is such a thing as good debt, and that is the mortgage you take out on your family home. Many of us will carry that kind of debt, many more of us will add to that with credit card debt and personal loans. It is that extra debt that I want to address today.
Unless you're working in a job you absolutely love and see your job as a career or a vocation, like the majority of the world's population, you're probably working primarily for the money you earn. There is no law that states you have to work full time for the rest of your life. If you can pay off your debt, save money and set yourself up for your later years, full time work could possibly make way for part-time work or early retirement. You do not have to work until you drop. You could take time out to enjoy life as well.
So how do we go about that? How can we draw a line in the sand and start paying off debt with the absolute intention of being debt-free, except for the mortgage, in the next few years.
- Lay-by and layaway plans are making a comeback. Until the creation of credit cards in the 1950s, and their common use by ordinary working people in the 1970s, we all used to save up for what we wanted and needed to buy. Many people used lay-by or layaway schemes, which was a way to pay for products in instalments before you could take them home. It was a kind of forced saving. Many shops are bringing back their lay-bys and layaways, or expanding them to include a wider range of products and prices. More info below.
- Stop spending. Adding to your debt will stop you paying off what you already owe.
- Think of prices in terms of work hours. For example, if you earn $40 an hour and you want to buy a new TV that costs $2000, you will have to work at your job for 50 hours to pay for that TV in cash. If you put it on your credit card or get a loan, it will cost more. And remember, that 50 hours work is on top of what you'll be working to pay off your other debt.
- Save an emergency fund. Everyone has unexpected debt from time to time. The fridge will break down, the dog will get sick, there will be something that crops up just when you can't afford it. Most of us put those unexpected payments on our credit card. If you have an emergency fund you don't have to do that. You can pay in cash. It's amazing how confident you'll feel when you have that buffer between yourself and unexpected debt.
- If you have more than one credit card, pay off the one with the highest interest first.
- Don't fall into the trap of paying the minimum payment each month. That option is the best one for the bank, not you. If you never pay more than the minimum payment, it will take you about 50 years to pay off your credit card. Every month you pay, you're also being charged interest, and it's usually high interest, so what ever you bought with your credit card will cost you about double what it cost someone paying cash. That doesn't make sense.
- Pay cash. If you do that, you'll find you're much more likely to check for bargains and not be fooled into paying for something you really don't need.
- Track your money to see where it is being spent. At the end of every week, work out your non-essential spending - all those cups of coffee, magazines, takeaways, movies, chocolates etc that you don't need. You non-essential spending amounts are your potential savings. Continue tracking for a month to see your spending patterns, when you have a month's worth of tracking, you'll see clearly where you can cut back and save.
- Know how much debt you have. Sit down with your partner and work out what you owe. Then work out a plan on how to pay it off.
- If you're doing this with your partner, don't lay blame, and forget about what you spent in the past. It is not productive to say: "YOU spent $200 on football tickets last month." or "YOU spent $400 on a pair of shoes." What is spent is spent. Draw a line and go forward from that point.
- Make some of your own products - homemade soap, laundry liquid, bread, dishcloths etc will save you a lot of money.
- Think about different ways to save: Cancelling your pay TV or mobile/cell phone will save money. Cutting back on groceries with prudent buying and stockpiling can save money. Reusing and recycling will save buying new - shop at op shops.
- Renegotiate your monthly bills such as insurance, phone and internet accounts. Even electricity accounts might be able to be renegotiated. Do some research first and know what the competitors are offering before you phone your provider. Be polite and let them know you have done your research, ask for a better price and hopefully they'll give you one rather than lose you as a customer. At the very best, you'll get a good reduction, at the worst, your payments will stay the same each year.
I am not going to tell you this is easy. It's not. In fact, if you've got a lot of debt and you've been flashing the plastic for far too long, it will be difficult. But it's not impossible and it will get easier. Starting is the hardest part because as you start to see the rewards of your debt reduction efforts, you'll feel in control and motivated to keep going. We have no debt. We paid off our mortgage in eight years instead of the twenty years we signed up for. Paying off our debt was one of the important milestones for us, I guess it will be the same for you. I do know for sure that once you've made the decision to pay down your debt, started working on it and made some progress, you'll feel a kind of liberation and satisfaction.
Credit card debt is one of the most insidious and treacherous modern life traps - it will stop you living to your potential. If you're up for it, I refer you to Lisa's debt challenge on the Down to Earth Forum. There are many people there making a commitment to paying off their debt and getting support and encouragement as they go, from others doing exactly the same thing. If you decide to take this important step, click on the link and join in. Let me know what you're doing - I am interested and really encourage you to do this. If you've paid off your debt, or are in the process of doing it, please tell us how you did it. Your tip might be the one that saves someone else.
Credit card debt is one of the most insidious and treacherous modern life traps - it will stop you living to your potential. If you're up for it, I refer you to Lisa's debt challenge on the Down to Earth Forum. There are many people there making a commitment to paying off their debt and getting support and encouragement as they go, from others doing exactly the same thing. If you decide to take this important step, click on the link and join in. Let me know what you're doing - I am interested and really encourage you to do this. If you've paid off your debt, or are in the process of doing it, please tell us how you did it. Your tip might be the one that saves someone else.
