Did you overdo it during the holiday$?
Many of us did overspend. It’s easy to do. But now that the bills are due, how can you get back on track? Here are a few tips.
Before we jump in, did you know that over the past year, the average interest rate for credit cards has jumped from 16.27% to 21.19%? This is a whopping 30% increase! Meanwhile, the average employee pay raise for 2023 was 4.4%. For someone carrying a credit card balance, this is a problem. Time to get these balances PAID so that instead of paying these high interest rates, your money is earning high interest.
Start with your budget. What is your net income? What are your expenses? And how does your new debt fit into all of this? Figure out the outstanding balance on your debts, along with the current interest rate, and minimum payment (expense) for each. Now, subtract your expenses from that income. Hopefully you’re seeing a positive number. If it’s negative, there are still options. Let’s continue…
Develop a strategy to pay down your high interest rate debt (anything over 8%). The quickest and least expensive way is the avalanche method, which is applying the same amount of money toward all debt by focusing on paying extra toward the highest interest rate debt first, the minimum payment on the others, and once the highest interest debt is paid, applying all those dollars to the next one on the list, and so on. Powerpay.org has a great calculator to help. For example…
Say you have 3 credit cards. Apple has $2000 on it with a 25% rate/ $50 minimum payment. Beta has $3000 with a 22% rate/ $46 minimum pay. Carma has $1000 with a 30% rate/ $32 minimum pay.
The highest interest rate is on the Carma card, so this is your first priority. Next in line is Apple at 25%, and then Beta at 22%.
Good news - you have $200/mo you can spend on debt. You’ll pay the minimums on Apple and Beta and apply ALL the rest to Carma…$104/month.
Once the Carma card is paid, you will still pay $200/month on debt, and now apply $154/mo to Apple and $46 to Beta, until Apple is paid.
Then, all $200 goes to Beta until that one is paid. This creates the avalanche, with more $ going to debts as the higher interest rate debt disappears
(then, you can apply that $200 to a high-yield savings account and start EARNING interest for your savings goals)
Request lower interest rates. Did you know that you can call your lenders and ask them to reduce your interest rate? They want you to pay your debts and many times will negotiate. The worst they can say is ‘no’, right? I’ve had clients do this successfully and save a LOT in interest. Here’s a helpful article on preparing for your conversation.
Do you have a good credit score? You may be able to apply for a 0% balance transfer card. There will be a fee for this transfer, and you’ll have to have a solid plan to pay down the balance before the term ends, or else you may be socked with a big accumulated interest bill at the end. But if you can stick to your plan and the numbers make sense, this is an option. Same is true for taking out a personal loan through your bank, credit union or even a friend or family member. The interest rate is likely to be much lower, but you’ll have to make sure you pay it back on time or be hit with fees, or worse, sour your dear relationships. And always review all terms and conditions to be sure you fully understand the rules.
Debt management plans can help with large amounts of debt across multiple lenders. These companies will work with your lenders to reduce the interest rates and create one monthly payment for you to pay to them. They will then pay the lenders for you. They will also require you to stop using those cards. There will be a setup fee and monthly fee for this service, and both are in the $50 range based on your state. Reputable companies include Apprisen, ChristianCreditCounselors and Greenpath. Beware, though - you’re going to need to be sure you don’t continue to overspend once you’re on one of these plans, else you’ll likely make your financial situation even worse.
If all else fails, and your income will not cover your expenses, you’ll need to consider additional employment to generate more income, looking around your home to sell items of value or possibly, filing for bankruptcy. Don’t be afraid to contact a credit counselor and/or bankruptcy attorney for advice.
Do you or someone you know need assistance with financial organization? I’m here to help.