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Credit Cards: More Costly Than You Think!
By Robin S. McGlone, Home Mortgage Consultant

“You want 21 percent without risk? Pay off your credit cards.” Andrew Tobias

With gas prices increasing, tightening of bankruptcy laws, and interest rates rising…it’s really no wonder that the average default rate on credit cards is climbing. According to the American Bankers Association, nearly 5% of credit card accounts had payments that were 30 days or more past due in the second quarter of this year.

But missing payments on credit cards can be more costly than you think. The late payment will result in the creditor imposing a late fee – on average $27 – and more importantly, they will bump up the future interest rate you are charged. And get this…being late on one credit card may trigger the other creditors to increase the interest rates as well, even if you’ve made the other payments on time. This is known as the "universal default" clause, and is disclosed in that famous fine print on credit card agreements. Credit card companies can monitor your financial activities and if they feel that the risk of being repaid is high, they have the right to increase your rate. The state in which the creditor is located may have an impact on the interest rate too – take a look at your credit card statements to see where they are based. Notice South Dakota or Delaware? They are among several states without usury laws, meaning there is no limit on the interest rate charged.

So, how do you know if you are in too deep?

If you always make the minimum payment, are late on other payments or borrow from one creditor to pay another, you are overextended. However, you are certainly not alone. The latest statistics show Americans owe $798 billion on credit cards. Broken down, the average credit card liability per household was $9,312 in 2004 (that amount has increased 116% in the past ten years) and approximately 35 million Americans pay only the minimum payment required each month. If you are among the many paying just the minimum payment on an average card balance of $9,312 with an average interest rate of 11.84%…it will take 23 years and 8 months to pay off the debt, not to mention the additional $8,165 dollars you will pay in interest.

So what to do? Start by keeping your card balances well below the maximum credit limit. This will also help improve your credit score. Next, make a list with the name of the creditor, the balance, the minimum payment due, and the interest rate. Review the list and pay off as many small accounts as possible. Then, make the minimum payments on all credit cards except the one with the highest interest rate -- make the minimum payment plus any addition amount to the highest interest rate credit card. Once the first credit card is paid in full, continue this process until all credit cards are paid in full.

To determine the best financial plan for creating monthly cash flow and paying off debt, contact your mortgage or financial professional for a free analysis.


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