Credit Basics
Shaky house of cards Pay off credit debt before it all collapses
Dave Burge
Monday, September 5, 2005
Use some self-control, limit your impulse spending and put those credit cards away, experts say.
Also, make sure you make more than the minimum payment each month.
Those are some common-sense ways to get out of credit-card debt and turn your finances
around, experts say.
Westsider Xavier Alvarez, 35, accumulated some credit-card debt as a student at
the University of Texas at El Paso and has worked hard since then to get his finances
in order.
He hasn't used a credit card in five years.
"I was making the minimum payments and spinning my wheels for years," Alvarez said. "I finally decided to pay it off. I decided not use credit cards again and live within my means and pay as I go."
The result is that Alvarez has been "able to invest and save, have life insurance and a 401(k)," he said.
"It's allowed me to have a portfolio," Alvarez said.
Greg McBride, a senior analyst with personal-finance Web site Bankrate.com, said the "best return on your money is to pay off your high-interest debt, like credit-card debt."
"There are no tax benefits for credit-card debt, and usually it's the highest-cost debt that a household has," McBride said.
El Paso certified public accountant Gayle Cook said the best way to "break the cycle of credit-card debt" is to make more than the minimum monthly payment while not incurring further debt.
"Making more than the minimum payment is really key," Cook said.
If you have owe $9,000 at 17 percent interest and you make only the minimum payment of 2 percent of your balance per month, it will take you 48 years and six months to pay off your debt, according to Bankrate.com. You will also pay about $21,000 in interest.
Even under the new guidelines, it will still take you almost 17 years and cost you $6,000 in interest to pay off a balance of $9,000 at 17 percent if you pay just the minimum, according to Bankrate.com.
The typical American family has accumulated $9,000 in credit- card debt with an average interest rate of 17 percent, said debt expert Howard Dvorkin, founder of nonprofit Consolidated Credit Counseling Services Inc.
"Debt in general has become a way of life," Dvorkin said. "Americans' views on debt have changed in the 15 years I've been doing this and during the 40 years I've been alive."
"People used to save up" before making a purchase, Dvorkin said. "Now, it's just instant gratification."
Minimum payments will keep you in debt virtually forever, Dvorkin said.
Ninety percent of your minimum payment goes toward paying interest and only 10 percent goes to the principal, he explained.
Effective in January, the federal government is "strongly recommending" that lenders increase minimum payments from 2 percent of the balance to between 3 and 4 percent, Dvorkin said.
"It will hurt like hell for a lot of people, but it will also make you get out of debt faster," Dvorkin said.
increase minimum payments from 2 percent of the balance to between 3 and 4 percent, Dvorkin said.
"It will hurt like hell for a lot of people, but it will also make you get out of debt faster," Dvorkin said.
Dvorkin recommends that you pay at least three times your minimum payment if you can.
"You could end up in far worse shape than where you're at" by transferring a balance, Dvorkin said. "I recommend that you go to the credit-card company that you already have a relationship with and negotiate a lower rate."
If you can afford only the minimum payments on your credit cards or are constantly taking out cash advances to make ends meet, you may have a problem, Dvorkin said.
If that's the case, you should consider seeing a reputable, certified credit counselor, he suggested.
"But that should be a last resort," Dvorkin said. "Try to do it on your own, but if you can't, get some help."
