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Managing Credit Card Debt – Part 2 of 2

{ Posted on Apr 03 2010 by Marcus Alston }


Yesterday I shared some suggestions on actions you can do to manage your credit card debt during these unprecedented economic times (“Do’s”). Below are some things I suggest that you do not do related to credit card debt (“Don’ts”).

8 Don’ts

1. Pay the minimum on your credit cards because it will cost you a lot in interest. For example, a credit card with a $5,000 balance with an Annual Percentage Rate of 18% and a minimum monthly payment of 2.5% of the balance ($125 for the first month) would take you over 12.5 years to pay off the balance if you make only the minimum payments for the life of the balance. And you will have paid $5,577.05 in interest alone on top of the $5,000 for a total of $10,577.05! Even if you cannot pay a huge amount, paying even a little more than the minimum can significantly reduce the interest you end up paying over the long haul and the years it takes you to pay off the card.
2. Live above your means. If you create some more debt, you may not be able to be in the position you want to be in for retirement or to fund your children’s education.
3. Use one credit card to pay off another or to meet bills that you cannot otherwise pay for unless you have the discipline to manage your credit card debt effectively.
4. Use your credit card just to earn points (unless you pay off the balance every month). These points amount to 1% or less of what you purchase and they are charging you 9% or more in interest on average if you keep a balance each month.
5. Borrow from your 401K to pay off credit card debt. By doing so, you are depleting your retirement savings, creating a loan for yourself to repay, and potentially creating a worse situation because you have not addressed the reason for your credit card debt. You may end up running up the balances on your credit card and now you have a loan to pay as well.
6. Use a home equity loan (or line) to pay off credit card debt, even if you get a great rate on your home equity loan. Your credit card debt is unsecured and if you are unable to financially pay it off and stop paying it, at least your creditors can not come after your house to pay your credit card debt. Home equity loans are secured by the equity in your home. If you put the credit card debt on a home equity loan and stop paying, the lender that provided you the home equity loan can foreclose against you for not paying the debt.
7. Use high interest rate credit cards, including retail store cards, which often have some of the highest interest rates.
8. Pay off your credit cards and run up the balance on them again.

It may not be easy to do without what credit cards can provide, but it’s these tough choices that will pay off for you and your family in the long run and help provide the financial stability that is most needed in these times.

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