By John Lee
There thousands of books and articles written about how to be financially successful. Some of these books are written for rich people that already have money, and some of them are written to folks that need to feel good about themselves and what they are doing. Many books and articles are written by financial planners and self-help gurus that have lost touch with the average person. I am writing this article from the perspective of a bankruptcy attorney.
Part Two: Power Pay Your Unsecured Debt
As a bankruptcy attorney, I would have to say that unsecured debt is almost always bad. The vast majority of people that need my services have a large amount of unsecured debt. A few rare exceptions may be starting a business or student loans, but generally speaking, if you are putting your vacation, groceries, clothes, or other consumer goods on a credit card, then you are not financially secure. There are some folks that pay off their credit cards every month to a zero balance and pay no interest or fees, and if you can do that, then more power to you. The folks that use a credit card and pay it off at the end of the month are normally doing it because they would rather use a card than carry around a lot of cash, or they are accumulating points for airline miles or other rewards. If you find yourself with a credit card balance carrying over from month to month, then you need to cut up your credit card and start paying it off.
New federal regulations require credit card companies to let people know exactly how long it will take to pay off their balances if they make only the minimum payment. These news laws are great for consumers because now folks can see just how much interest they are really paying, not to mention penalties and fees. If you buy a consumer item on a credit card, and then make only the minimum payment, you could pay three times the original purchase price in interest payments. Why would any one want to pay triple the price for any item?
I recommend, along with starting to power pay your mortgage, starting a plan to power pay down all existing credit cards. Also, when trying to become financially secure, if one has had a problem with credit cards in the past, to cut up all but maybe one credit card. Some financial gurus out there may want you to cut up all your credit cards, but that’s not realistic in a world that wants a credit card to rent a car, book a hotel room, purchase goods online, etc. But when you select a credit card to keep, it should be the one with the lowest balance, the lowest interest rate, or the lowest available credit. Don’t keep the high interest rate card with a high available balance.
When deciding which credit card, or other unsecured debt, to power pay first, there are two schools of thought. The first school of thought is to pay down the highest interest rate card first. The second school of thought is to pay down the lowest balance first. Both plans have merit, and you should choose the one you feel is best. If all your interest rates are roughly the same, then pay down the debt with the lowest balance first. If you pay down the card with the lowest balance first, then you will have a sense of satisfaction and feel like you are getting ahead faster. Also, by eliminating potentially damaging items on your credit report, you will start to see your credit report improving faster. If you have one particular debt that has a much higher interest rate than the others, then you should start by power paying that debt down first.
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