We started this little adventure together by looking at calculating our net worth. We made a list of liabilities – money owed – as part of that calculation.
Today we are going to delve deeper into those liabilities and talk about debt. I know it isn’t fun, but just think how free you will feel once all that debt is gone forever!
If you are one of those who (correctly) included a mortgage or personal loans in your liabilities column, we will address that one day very, very soon. Similarly, if student loans have got you down (literally and financially), we deal with those here, don’t despair. Today, we are going to focus on:
CREDIT CARD DEBT
(slasher sound effects from shower scene in Psycho)
Don’t run, hide or cower in fear – I did that for years… hiding from mountains of credit card debt and just barely paying the minimum payments every month. Totally not worth it… I promise.
I opened up a couple credit cards my first year of college (2004… yes… thirteen years ago…) and most were maxed out within two years and I only ever made minimum payments or maybe a bit more if I was feeling particularly flush. This essentially means that the pizza I paid for in college in 2004… twelve years ago… has now cost me hundreds and hundreds of dollars (face palm). Oh, the stupidity of youth.
When you were listing out liabilities for the net worth calculation, there should have been one row for each credit card you have. Count them ALL. When I first did this exercise, I had four credit cards in the UK and seven credit cards in the US (seven of which were store-specific credit cards). Don’t judge.
We are going to start with that list (credit cards and the current outstanding balance) and add a really important column to it: interest rate. Your table should look like this:
|Credit Card||Outstanding Balance||Annual Percentage Rate (APR)|
Credit card interest rates can be found by looking for the APR, or annual percentage rate. The APR that is being charged will be different for each individual and for each card – check your monthly statement or original credit card agreement, the number will be on there. This number is determined based on a variety of factors, mostly related to your credit score and income. For a full explanation of what exactly APR is and what it means for your credit card debt, click here!
It is also important to know that different interest rates may apply to different things – if you are using your credit card for purchases, it is pretty straightforward. However, if you are using your card for cash withdrawal (usually a higher interest rate) or balance transfers from other credit cards, the APR will be different.
For the purposes of this exercise you need to understand exactly what APR is being applied to each of your outstanding balances, so if you have a cash balance with one APR and a purchase balance with another APR, you need to list these separately (even if they are technically the same credit card).
It may take some digging to get to the bottom of your APR hunt but stick with it. It is important to know what interest rates apply to your outstanding credit card balances because that is how you will prioritize your repayment.
To give you a point of comparison – the average APR for credit cards in the US ranges from 12% to 22%… which means that there are credit cards much lower AND much higher. The average for store-based credit cards (think Gap, Victoria’s Secret, Nordstrom, Bloomingdales etc., etc.) is 24%. My highest non-store credit card was 22.8%. My highest store-based credit card was just over 30%. 30%… let that sink in… heaven almighty.
The higher the interest rate, the more that debt is hemorrhaging – we need to stop the bleeding. We will go through a variety of options to slow and eventually stop the interest rate from taking over… but let’s address your Prioritization of Payment or POP – because that is what we will be doing when this is all over… poppin’ bottles.
Take your list of credit cards, balances and APRs… and put in POP order – highest interest rate first and work your way down. This is your plan of attack – prioritize paying off the credit card with the highest interest rate as soon as humanly possible… because it will keep growing if you don’t.
Sincerely yours in harmonious fun and fiscal responsibility,