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  • Putting America Saves Week Into Action– Step 2: Paying off high-interest debt

    ASWGraphicBefore I begin talking about what I did to deal with debt, I wanted to share an inspiring story with you about one of my co-worker’s friends. We’ll call her Sarah.

    Sarah was a single mother whose first marriage ended very poorly. She received no financial help from her ex-husband, so she began to accumulate credit cards, and thus debt. It certainly was not ideal. When she met her current husband, he also had some financial concerns. He was carrying an interest-only mortgage on his house, which he had bought from his first wife. In Sarah’s own words, “it was a financial mess.”

    Sarah and her second husband made it a priority to get debt-free. They converted his mortgage to a conventional one so they could refinance it and begin making payments on the principle. They focused on paying off higher interest loans first, used annual bonuses to pay off credit cards, and paid more frequently (every two weeks). Now, five years later, they are debt-free and down to one credit card, on which they make sure they pay three or four times the minimum payment every month. Sarah and her husband also contribute the maximum amounts to their 401(K)s to get the corporate match. She says that the big thing that helped was agreeing to a policy of not using a credit card unless it was an emergency (like unexpected car or house repairs). Focusing on getting her debt under control has made her and her family’s finances more secure for today and for the future.

    My story is different from Sarah’s, but it still involves taking a closer look at how I manage my credit and debt.  Today, I took a look at my credit cards. I personally am a fan of company or store cards – Macy’s, Target, etc. While shopping, these offer some great ways to save. The downside: many company specific credit cards have high interest rates. Some are 24%. I always pay more than the minimum, which is a BIG WISER basic, but I usually pay attention to the total amount on the card, not the interest rate when deciding how much to allocate to each card.

    piggy bankIn honor of America Saves Week, I took a second look at my interest rates, and then I put my cards in order based on interest rates from highest to lowest. I wrote this list down and saved it to my computer. Now, each month when I go to pay my cards, I can apportion my money based on the interest rates of my cards.

    I also took a second look at the “offers” that come with these company cards. If they have such huge interest rates, am I really saving that much along the way?  Target, for example, offers 5% discount at the counter, but then a 22.9% APR will cost me in the long run if I am unable to pay off the total amount each month. Instead of canceling it, I am inspired by Sarah’s idea of implementing a self-regulating policy. I will only use my company credit cards if I am able to pay the entire amount of my purchase. Basically, if I do not have money in my bank account to cover it, I won’t use the credit card. This way I can pay with my credit card and get the discount, but I will not have to worry about the awful interest rate when the bill comes due. I will also think twice about opening up any additional credit cards, since the more credit I have available, the more likely I may be to use it.

    The truth is most of us have some type of debt that we need to pay off. While each story is different, we can all work towards a better outcome like Sarah. Your story may be different, but you can still take the same steps to fight your debt.

    What is the highest rate of interest you’ve seen on a credit card? How do you curb the temptation to charge a “splurge” purchase to your credit card that you don’t have the money to pay off right away? Let me know in the comments!

     

    One Response to “Putting America Saves Week Into Action– Step 2: Paying off high-interest debt”

    1. Tim Jenkins says:

      Great Article. I myself am going through the process of paying off some high interest credit cards that rates soared on when I was late on one payment. No I am trying to climb my way out it.

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    WISER is a nonprofit organization that works to help women, educators and policymakers understand the important issues surrounding women's retirement income. WISER creates a variety of consumer publications including fact sheets, booklets and a quarterly newsletter that explain in easy-to-understand language the complex issues surrounding Social Security, divorce, pay equity, pensions, savings and investments, banking, home-ownership, long-term care and disability insurance.

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