Tag: financial managment

Minimizing the Costs of Credit Card Balances

Americans have a love affair with credit cards. They make life easier while also making it easier to overspend. Studies reveal that a purchaser will spend an average of 20% more on an item when using a credit card than when paying with cash.

Person using a laptop computer and holding a credit card. Title is "Minimizing the Costs of Credit Card Balances."

Credit card usage peaked in the fourth quarter of 2008, as the nation entered a severe recession, with balances reaching a then-high of $866 billion. Credit card balances fell significantly over the next 5 years. As the economy recovered, however, the use of credit cards and credit card balances began to rise. Today, credit card balances are approaching the $1 trillion level. The average consumer carries a credit card balance of $7,279 (Lendingtree.com). Fifty-three percent of credit cards being actively used are not paid off in full each month. The average interest rate of these balances is 20.92%, and the average interest rate being offered to new borrowers is 23.65%. 

The good news is that most Americans make regular credit card payments, and only 2.25% of credit card balances are delinquent by 30 days or more.

The minimum credit card payment is typically about 2% of the balance. On the average balance of $7,279, the minimum payment would be $86. At that payment and an interest rate of 20.92%, it would take a borrower 28 years and 3 months to pay off the debt. The total interest paid would be $27,776. In this scenario, the $7,279 in debt would cost the borrower $35,055.

When a consumer (that’s you) begins to take an active role in their financial future, they can minimize the interest on credit card balances. Remember, interest is handing part of your hard-earned paycheck to someone loaning you money. If you are not paying off your credit card each month, you need to determine why you carry a balance. 

The steps below can help you make advances on getting a handle on your credit card debt: 

  1. Always pay at least the minimum balance on time.
  2. Set up automatic payments to ensure that payments are always made on time.
  3. Pay more than the minimum balance whenever possible.
  4. Consider the actual cost of debt before making large purchases on credit cards.
  5. If your balances are on multiple credit cards, prioritize paying off the card with the highest interest rate first.
  6. Live below your means so that you will have some money each month to put toward your credit card balances.
  7. Create a budget to live within your means. (Refer to my past posts on budgeting) 

To learn more about how to manage your money and pay off debt, please click the Finances categories tab to find many blogs on money management, budgeting, and stewardship. My book Honoring God with Your Money is a great tool for financial money management.

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Methods for Tracking Spending

Have you overdrawn your bank account recently?  Are you running up balances on your credit cards because you don’t have enough money to cover your monthly expenses? Do you find yourself wondering where all your money went? Do you want to save money for a memorable trip, yet find your savings balance decreasing rather than increasing?    If you answered yes to any of these questions, you need to create a budget and set financial goals.

Creating and sticking to a budget will allow you to stay out of debt and achieve your financial goals.  However, you need to know where your money is going before you can create a budget that will work for you. Start by tracking your spending for a few months.

Cell phone with spending app open

In times past, most people tracked their spending using a notepad and pen. I recently found a spiral notebook that my grandmother used to record her spending in 1956. She used a separate page for each month. She listed her take home income at the top of the page and carefully noted each expense. As a single woman, she brought home about $275 each month, so it was imperative that she managed her money well. This method still works well if you faithfully write down all your expenditures.

I am a big fan of spreadsheets. When my husband and I started our own home twenty-five years later, I used a pen and paper method, too. But, a few years later, when Lotus 1-2-3 (precursor of Excel) was introduced, I graduated to using a spreadsheet to track income. Today, I use Quicken to track and balance my bank accounts, and I use a spreadsheet to develop our budget. I balance my checkbook every week or two to be aware of my spending and how much money is in my accounts.

Other people use different methods. I have friends who use the envelope system. On each pay day, they cash their checks, put their budgeted savings into their savings account, and allocate the rest toward expenses. The money for each expense category goes went into a separate envelope. They pay cash for all expenses, and when the envelope is out of cash, they spend no more on that category for the remainder of the money.

Today there are many apps to help you track your spending. Some can be connected to your bank accounts and credit cards. Some apps simply track your spending, while others allow you to input spending parameters and are indeed budgeting tools. Apps benefit those who do not balance their checking accounts regularly. According to StatisticBrain.com, 79% of people rarely or never balance their checking accounts.

Some of the most popular spending apps currently are:

  1. Mint. This free app can sync to your bank accounts and credit cards. It allows you to set goals, track investments, and be reminded of when to pay bills. It will also alert you when you have exceeded your spending goals.
  2. YNAB (You Need a Budget)–This zero-based budgeting system lets users allocate all income into spending categories, debt reduction, and savings. It also lets users set goals. The downside is that after the free 34-day trial ends, you must enroll and pay a monthly or annual fee.
  3. Goodbudget. This system mimics the envelope method. The user assigns an amount to each “envelope.” This method does not connect to bank accounts or credit cards, so the amounts must be entered manually. This is a good version for those who do not want all of their accounts connected. There is a free version, but if you want to track more than a few categories, you may need to pay a fee.
  4. Every Dollar. This method is similar to my method of recording expenses in Quicken and using a spreadsheet to track totals. Like Goodbudget, it does not connect to bank accounts or credit cards. All expenses must be entered manually. It does allow the user to set reminders to pay a bill.

There are many other apps available that you might want to consider. Choose a method based on compatibility with your style and personality. Mint or YNAB might be a good choice if you want to connect all your accounts without entering expenditures manually. On the other hand, these systems may not be suitable for you if you worry about identity theft and the risks of having things too automatic. So, set aside a few hours to evaluate the options available and decide to start using one of them to track your expenditures.

If you need help to learn to manage your money and improve your credit, please check out some of my other blogs on Finances, Money Management, and Stewardship. My book Honoring God with Your Money is a great tool for financial money management.

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