One of the biggest setbacks on your financial portfolio may be the enormous interest you pay for your credit cards each month. According to a Federal Reserve report that was published in 2008, American’s credit card debt for the first quarter of 2008 totaled around $950 billion. This means an average household in the United states had more than $8500 in credit card debt. This may seem small given that homes with families are bound to make purchases on a regular basis and that amount is significant when they are making big item purchases like house, multiple cars and luxury items. And credit cards offer a bid convenient. They don’t have to carry cash everywhere they go and buying things just take one big swipe.
The problem is that by doing so they will end up paying more for things than if they have paid cash because the cost of financing is more when interest and other charges add up. In addition, retailers who accept credit cards for major purchases like cars mostly charge additional fees as well. If you are paying a minimum amount every month for those credit card purchase, it will take you years to get off the debt. Creating a plan for the future will not only pay down the debt more quickly but you will become debt free in the long run as well. In addition, you can ask your financial advisors about options for personal loans for bad credit.
So what can you do to be free of debt in the future? Below are some ideas.
Cancelling Credit Card Debt
This is a direct approach one can take to reduce their debt. If you have talked to your credit card company and they agreed to reduce your outstanding balance to some extent or cancel the entire debt, you are going to be debt free shortly. However, note that most cancellation of credit card debts will end up in unexpected tax bill to deal with and you wish you had access to credit instead of paying this tax. The cancellation of personal debt is taxable income because you are relieved from the debt you owed to others. The debt is only forgivable if it occurred when you were in bankruptcy. This means the credit card debt forgiveness is excludable if you were insolvent immediately before the cancellation takes place. In such cases, your debts should exceed your assets.
Creating a Budget for Repayment of Debt
Another way to reduce or pay off credit card debts is to build into your monthly budget a plan that will pay off your debt eventually. This could be a short term plan or a long term one depending on your financial situation. Any extra funds that you can earn or save can be applied to this debt repayment plan to lower the debt. If you have saved enough money, it makes sense to pay off the debt if that is incurring interest rate and debt related charges. You may be paying a higher interest rate on the debt than you could be earning in interest on the savings.
Increasing Monthly Payments
The more you pay off toward debt each month, the more quickly you can reduce your debt and the more you will save in interest payments. For example, if you are paying an extra $50 every month on a $3000 credit card debt, for the period of six years at the current interest rate you could be saving at least another $3000 in interest payments. Any extra amount will shorten the amount of time of your debt payoff efforts. There are many calculators online where you can see how much you will save and what effect adding money to your payment each month will do.