Dealing with Debt
By Joseph Montanaro, USAA Financial Planning Services
Plan strategically
If you have more than one credit card, focus your biggest payments on the card with the highest interest rate. This will minimize the amount of money you’re wasting on interest charges. Typically, credit cards from department stores have the highest rates.
A different strategy would be to pay off the card with the smallest balance first, which would allow you to see progress quickly and give you one fewer bill to pay each month. Either way, the important point is to make a plan and stick to it.
Card-hop with care
As another way to minimize interest charges, you might look into transferring your balance to a new card with a lower annual percentage rate. It can make sense under the right circumstances, but be warned – a credit card offer that sounds too good to be true probably is. Many cards offer extremely low rates for an introductory period, but make it up through extraneous fees and a sky-high rate after several months. Read the fine print carefully to make sure you’re getting a good deal.
Another danger of card-hopping too frequently is damaging your credit score. Every move you make is recorded on your credit report, and lenders tend to see frequent balance transfers as a sign of high risk. Too much skipping around could hurt your ability to qualify for loans and low interest rates.
Start saving for next time
Once you’ve successfully banished that monstrous debt, make sure it stays away for good. As soon as possible, establish a “holiday fund” and begin stashing away a small amount from each paycheck. Many banks and credit unions offer interest-bearing “Christmas Club” accounts specifically for this purpose. But stuffing $10 a week into a shoebox can work if you have the discipline not to touch it.
When gift-buying season rolls around, start with a firm budget and a detailed shopping list. If Santa can stick to his list, so can you! Start early to give yourself plenty of time for comparison shopping. You may be able to find better deals online if you have a few weeks to spare for shipping. Don’t exceed your budget and if it’s not on your list, don’t buy it—even if it’s on sale. Ideally, you should be able to make most of your purchases with the cash you saved throughout the year.
Joseph "J.J." Montanaro is a CERTIFIED FINANCIAL PLANNERTM practitioner with USAA Financial Planning Services, one of the USAA family of companies. Montanaro served in the U.S. Army for six years on active duty. He is currently a Lieutenant Colonel in the U.S. Army Reserve.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.