As of April 18, 2018, the average credit card debt or household is $8180, with the total credit card debt for the United States in excess of $1.031 trillion. This means that America has now exceeded credit card debt that preceded the great recession of $1.02 trillion. This is an alarming statistic since the average credit card debt is only a middle figure – 50 percent of 126 million households own more than the average.
Many people with above average credit card debt are struggling with minimum payments on multiple cards and also trying to meet regular expenses such as utility bills, medications, transportation, and housing expenses. Additional debt such as student loans or automobile loans, medical debt or foreclosure can complicate the picture even further. People call it “drowning in debt” for a reason, feel as if you’re in over your head and going underwater.
What Minimum Payments Really Do
Looking at credit card debt, be it large or small, can be discouraging. Making minimum payments doesn’t seem to make much of a dent in overall balance figure, but it can keep you going from month-to-month with some money in your pocket. Unfortunately, this method of payment can have a higher cost even if you still have money in your pocket after paying the minimums on your credit cards. Card issuers are allowed by law to use that minimum payment towards interest plus one percent of the principal. Some issuers will simply cause the minimum payment to be a percentage of balance, but the majority of this type of payment is also devoted to servicing interest with a minimal amount paid down on the core debt. If you are paying only the minimum payments on your credit cards, compounding interest is costing you a lot of money and, in the long run, you are paying much more for those purchases than you thought.
There are a few different methods to successfully pay down debt. We have previously discussed the snowflake method. Now it’s time to discuss the debt avalanche method. Every financial advisor on the internet seems to have an opinion on which method is best for paying down debt. I am going to come down firmly on the side of “it’s your choice.” Whatever method you try and succeed with is the best method for you. Let’s break down how to use the debt avalanche method.
1. Sit down with your credit card and figure out which balance is carrying the highest interest rate.
2. Work out a budget that includes all of the minimum payments for the credit cards, household expenses, and regular monthly expenditures.
3. See what money is left over and then apply a portion of that to the card with the highest interest rate.
4. Each month pay the extra on the highest interest card until the balance is wiped out.
5. Start the same process over again with the card that has the next highest interest rate.
6. Lather, rinse, repeat.
As an example, let’s say that this is your current debt profile:
● $27,000 in subsidized federal student loans at 5.05%
● $7500 in private student loans at 6.25%
● $13,000 automobile loan at 3.75%
● $4250 in credit card debt at 17.6%
Using the debt avalanche method, the credit card debt should be first so that you will save money on compounding interest. After that balance is paid, the private student loans would be next on the payoff roster. Even the student loan debt is not insurmountable once the higher interest debts have been paid.
This debt avalanche method takes more patience than the snowflake method. Where the snowflake method for paying down debt relies on tackling and wiping out the smaller balances first, the debt avalanche approach may take longer to show results but saves money over time.
Of course, if you are very tight on income versus expenses and can’t see a way to work some extra into your payments, it’s time to figure out where to nip, tuck, and trim your expenses so that you can free up some cash. If you have cut your expenses to the bone, it might be time to consider bringing in other streams of income. Even with a full-time job, occasional driving for a ride-sharing service or working as a freelancer can help to bring in extra income that can be devoted to paying down debt. While nobody wants to work two or more jobs, the feeling of being freed from debt can be its own reward. Worrying about debt and how to pay it off takes up enough hours in the day that it could be an entirely different job.
Other methods for freeing up cash can include selling possessions, getting a roommate or housemate, moving to a less expensive housing option, looking at cheaper transportation options, and cutting back on money eaters such as buying lunch every day at work. Of course, if you have done everything that you can think of and still find yourself struggling with debt, then it is time to gather all of your paperwork and get some real help from real professionals who are experienced in handling individuals with complicated debt pictures.
Van Horn Law Group is not just a bankruptcy practice. It’s a big part of what we do, but it’s not all that we do. We can help people get a grip on their debt by guiding them through debt negotiation, consolidation loans, and work with people who have student loan debt, medical debt, underwater mortgages, and automobile loan debt. If you’re uncertain where to go with your debt problems, come to us for free initial consultation in our Fort Lauderdale or West Palm Beach office. We are open seven days a week and ready to help you out. Get a grip on your debt – with or without bankruptcy – and some sound legal advice from people who care.
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