We’re at it again. After four quarters of steady improvement, US consumers are on pace to end 2013 with around $46.7 billion
in new credit card debt. And if that should ultimately happen, it would make roughly $130 billion added to our tab since the beginning of 2010.
What exactly is behind this unfortunately ominous forecast? Interestingly enough, it’s the fact that we actually paid off nearly $32.5 billion in existing debt during the first quarter of this year.
It’s understandable if you’re a bit confused by that, but significant debt paydowns are common for the first quarter of the year. It’s when people get annual salary bonuses and tax refunds as well as pay off much of what they bought during the busy holiday shopping season. The thing is, our performance in Q1 2013 was not good enough to withstand the next three quarters of consumption.
You might also be confused about why so many great credit card offers still exist or how it’s possible for the economy to improve when people are racking up so much debt. The answer lies in the cyclicality of the credit market. As jobs have been added since the downturn’s end, more and more people have possessed the income necessary to make at least minimum payments on a credit card and therefore get approved for one. In other words, credit has been more abundant and charge-off rates have fallen because there’s been more money in the system. Issuers have even been able to pass along some of their savings from declines in uncollectable debt to consumers in the form of increasingly attractive rewards bonuses and long 0% introductory periods.
However, it’s clear that a growing number of consumers are using this long leash to buy things they can’t afford in the short-term and might not even be able to afford in the future. If this trend continues for much longer, minimum payments will no longer be enough and rising interest costs will make the debt unsustainable. Should an increasing number of consumers therefore default on their obligations, then rates and rewards would fall in value, credit would constrict, credit scores would plummet, and a great deal of pressure would be thrust upon an economy that’s already struggling to pick itself up off the mat.
Luckily, it’s not too late for us to change our fate. And it’s a superb credit card market to do so. Not only are issuers offering 0% introductory rates for as long as 18 months, but the free balance transfer credit card
recently made its comeback. That means you can trade in whatever finance charges you’re currently paying for a 0% intro rate (for 15 months in this instance), without paying a balance transfer fee or an annual fee.
In the interest of achieving a healthier financial trajectory – so that can save for college and retirement, instead of playing perpetual catch-up – here are some tips and tools that will help you get out of debt faster and save some money in the process.
1. Budget, baby.
Sticking to a budget is easier than ever these days, as the majority of our transactions are electronic and we have a smattering of cool new apps to help us track and manage our spending habits. So, determine what you should
be spending on different things each month, what types of expenses you really can’t swing, and then adhere to your plan as best you can.
2. Be prepared for emergencies.
These days, a conservative, long-term investment approach is really all you need to reap fairly substantial returns as the market bounces back. While risky choices do offer the potential of an even greater reward, those gone awry would not only wipe out the money you put into the market, but would also jeopardize your emergency financial reserves.
Speaking of emergency funds, if you’re currently in debt it’s important to take some initial precautions before trying to get too fancy with other areas of your personal finances. A key aspect of that is making monthly contributions to a savings account so that so you can stay afloat in the face of unexpected expenses or an income interruption. Your goal should be to ultimately have about a year’s worth of take-home in reserves.
3. Check out the Island (Approach).
In order to get the best possible balance transfer deal as well as the best possible rewards on your ongoing expenses, you’ll need to get separate cards for financing and spending. For example, you could transfer what you already owe to the Slate Card from Chase
(NYSE:JPM) (that free balance transfer credit card I mentioned earlier) and use the Barclaycard Arrival Card
(NYSE:BCS) to get a $400 statement credit in return for spending at least $1,000 during the first three months.
4. Snowball your debts.
When paying down debt, you want to get rid of the most expensive balance first. So, if you have multiple balances continue making minimum payments to the least expensive ones and allocate the remainder of your budgeted monthly debt payment to the balance with the highest interest rate. Repeat until debt-free.
5. Use a credit card calculator.
As you’ll see below, 0% credit cards can help you significantly lower the cost of your debt and/or save on big-ticket purchases. However, in order to maximize their value you must use a credit card calculator
to develop a payoff plan that enables you to comfortably pay down at least the majority of your balance prior to regular rates taking effect.
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