As a young man who grew up in lower class of the American system, I educated myself in financial literacy during my high school years to change the situation that surrounded me. Since high school, I have acquired 4 credit cards and over thirty thousand dollars of debt (of which 25K was transferred to the stock market and lost). Today, after surviving the Great Recession, I still own a home, a car, and all the things a man could want. I have a great job in a great location relative to my home and all seems to be well. I add the company-matching amount to my 401K every pay period, and I have a little extra money to spend after paying off all my bills. However, rather than keep the extra money in a savings account or try to utilize some other investment vehicle, I pay my credit cards down. Here’s why.
During the Recession, credit card companies took the opportunity to increase the interest rate on Americans considered risky regardless of whether or not they made every previous payment on time. This resulted in my interest rate going to 30% although my credit is quite good. So why do I choose to pay down these high-interest rate credit cards rather than the alternative? Well, it’s the same reason I’m in debt in the first place. For the past few years, I’d grab a paycheck, put all my purchases on credit cards and take the money I would’ve spent and put it in the stock market. The plan was to make a good positive percentage return on the money, sell it back and keep the profit for the time value of the money in the trading account as profit. It didn’t quite work out that way. More like that account went to zero. Well I’ve learned a lot since then about stocks, but at this point in time in my life, it makes sense to attack the priciest forms of interest that continue to increase my monthly expenses. I’ve previously written an article on credit card debt and the cost of the credit card service. So in my case, I’m doing just the opposite of what I did a few years ago. So rather than take the money and attempt to make a higher rate of return than the cost of the borrowed money, I use my money to tackle the balance on the credit cards since I can make a direct impact on the service charge of the plastic. I mean, what’s a 0.75% APR savings rate in comparison to a 30% APR credit card rate.
Since changing my strategy of utilizing my budgeted money for credit cards, I’ve run into the issue of not having cash when it’s needed. So keep in mind that if you allocate all you can to reduce the average daily balance on your credit card bill, you should also carefully budget how much should be applied towards the credit card balance. There’s nothing more annoying than having to borrow from family members because you forgot about an expense that requires a cash payment. However, there’s nothing more satisfying than knowing you’re reducing your monthly costs at a very high rate because of financial literacy without the pressures of attempting to make over 30% on your money through other methods. Just think, how would your life change right now if your monthly interest charge on forms of credit over 8% was zero?