In terms of long term benefit there is very little you can do to improve your finances that is more important than eliminating unsecured debt, particularly credit card debt. Most secured debts carry low interest rates and aren’t a problem unless the amounts financed were too high to begin with.
The reasoning behind the above is simple arithmetic. If your average interest rate on your credit cards is in line with the national average of about 11.82 percent, you would have to find investments that guaranteed a 11.83 percent return before it would make sense to invest extra cash rather than pay down credit cards. Here’s a somewhat oversimplified illustration of the point: You have $10,000. You owe $10,000 on credit cards. You will be charged $1182 in interest on your credit cards this year if you do not pay them off. There are no investment vehicles that will produce that high of a yield with no risk to your principal. You could get 5% or so with a money market fund, but not much more. Thus, paying off the debt, you improve your bottom line by $10,000 and avoid the additional $1182 in expenses. From there you can take the exact amount you were sending in monthly payments to the credit card company and put that into savings or investments of your choice.
There are several possible solutions to debt. Despite the marketing hype you see and hear from companies offering one kind of debt program or another, the only sure-fire “one-size-fits-all” solution to debt is: don’t carry unsecured debt in the first place. If you’re carrying balances on credit cards or have any other type of unsecured debt, you need to apply the right solution for your particular circumstances to get eliminate that debt as quickly as you can. Which solution you employ depends mostly on what you can afford.
Solutions for getting out of debt include:
- Debt “roll up” or “snowball” approach
- Minimum payments only (not much of a solution, but may be the best option in some cases)
- Debt management programs
- Debt settlement programs
- Bankruptcy
Each of these solutions will be addressed individually in separate articles, in some cases there will be several pages discussing that strategy and its ramifications.
