Prosper Newsletter: November 2007 > Financial
You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.
Figuring out which credit cards to pay down first
The average American has over nine thousand dollars in credit card debt, most of which is spread over several cards. With the holidays approaching, you shouldn't be thinking about which card to use for those holiday purchases, you should be thinking about which card to pay off first. When you start getting serious about paying off credit card debt, there has always been the question of which credit card to pay off first. Here are a few pointers.
The main variable you should look at is your annual percentage rate (APR). Most credit cards' APRs range from 10 percent to upwards of 25 percent. You should pay off the credit cards with the highest interest rate first. But credit cards may have artificially low interest rates. Read the fine print of your credit card statement, and watch out for the following situations:
- Tiered APRs. Look for APRs that increase depending on the account balance. You should pay down credit cards with tiered APRs to the balance with the lowest APR, and then try not to increase the balance above the lowest APR while you pay down credit cards with higher APRs.
- Penalty APRs. Some credit cards increase your original APR rate after you have made late payments a certain number of times during a specified period. Penalty APRs might be much higher than the original APR, so watch your APR rate carefully.
- Introductory APRs. Many credit card companies offer low introductory rates for a certain period of time, after which the interest will climb to its normal rate. Some people with balances on credit cards with high APRs will do a balance transfer onto a card with a low introductory rate. Balance transfers can be helpful in paying down large balances, especially when you are paying down the principal opposed to the interest. However, beware of when the introductory rate increases. Many times, the increased rate can be the same or higher than the rate you were paying on your previous card. If you have cards with low introductory rates, keep track of when those rates will increase, and try to pay down as much of the balance as possible while the rates are low.
- Fixed and variable APRs. Read your credit card agreement carefully to determine if your rate changes, in other words, if it is a variable rate. Variable rates fluctuate with other interest rates, such as the prime rate. If those rates increase, your rate increases. Although variable rates might be lower than fixed rates for a time, they always have the potential of quickly increasing. Check your credit card agreement to see how often your rate can change.
When deciding which credit cards to pay down first, you should look at the balance on each card, consider the interest rate, determine if the interest rate on any card is artificially low, and if it is low, figure out when you will start paying the normal rate. List the cards in order from high-interest producing cards to low-interest producing cards. Then determine if the cards have undesirable fees, such as annual fees. Do you want to pay down the card and cancel it before you are charged another annual fee?
Taking all these factors into consideration, you should then make a list of which cards to pay off first so that you can start getting yourself out of debt. Keep in mind also that not racking up credit card debt in the first place with get you farther ahead, faster. Watch your spending over the holidays, and you will find it much easier to pay down debt next year.
We were living above our means, believing that because we owned a house in Santa Monica, we would be set for life and all our debts would be forgiven (somehow) in the end. Nice fairytale. In reality, we were burying ourselves in debt; furthermore, the real estate market had begun its decline.
Jim told me about Prosper Learning, and I was at best skeptical about what it was offering. I just assumed that it was a scam of some sort. However, it seemed to mean a lot to Jim that I be open-minded about at least gathering information about what Prosper was about.
After discussing our finances with the first two counselors, I was happy to find out that Prosper was not a scam, and in fact, it was a God-send. We saw in black and white how bad our financial situation was, and how it was absolutely mandatory that we make some serious changes in our life.
Prosper provided the tools we needed, along with a great counselor, to figure out where we needed to make the changes. Jim and I came to the shocking realization that we had to sell our fairytale now, get out of as much debt as we could, and change our spending habits.
Actually, selling our home has been a multiple blessing in disguise. We found a home that feels like the home we were trying to make in Santa Monica. It has more room for everyone, and a wonderful backyard for our son. Jim is only 10 minutes from work now. No more commuting back and forth — this gives him at least 10 more hours a week to be productive at work, get home for family dinners, and spend more quality time with our son. He has the energy to do yard-work every Saturday morning (commuting zapped him of all energy). We are not only saving $120 a month by doing our own yard-work (I do my part, too) but it's providing some neat family time for us as we take care of our home together. Additionally, Jim has lost a good 10 pounds! I think I've lost a couple of pounds, too. :)
The underlying stress of trying to make our Westside fairytale manageable was taking a toll on Jim. But now, Jim looks so much happier (and younger), it's amazing.
Our new home provides a better, award-winning school system for our son. We live closer to family and friends. And the drier and much warmer climate is better for my sometimes-not-so-good health.
It's not just physically moving our residence that has changed. Speaking for myself, I know that I have to be better organized with spending money on the everyday expenses. Moreover, I have to find other ways to give to family and friends that doesn't rack up the credit cards during the holidays. Bottom line, I need to be more responsible with money. I know I'm not perfect yet, but I'm going to get better because it's a priority for me now. I have begun tracking all expenses, and this is the key to helping me properly keep to a budget.
Being more responsible with money doesn't mean that I have to deprive myself. I can still have fun on Saturday by spending $35 for a manicure and pedicure while watching an entire 'chick flick' for an hour and a half. I can do this once or twice a month, without it hurting our budget. I use to spend $70 twice a week at a nail salon -- and that didn't even include a fun movie! Additionally, I can pick up something fun to eat for the family at the store instead of ordering in. Obviously, we can get a lot more food from the store at half the price of ordering from Koo Koo Roo every Saturday night.
Being more responsible means doing more work, which, at first is tiring, but, I know that after awhile it will be easy and it helps the bottom line. I can save $214 a month by doing more of the house cleaning myself. Furthermore, once benefits transfer to the Regional Center near us, we will have all child care expenses paid for -- 14 hours a month of free child care Right now I've cut child care down $400 a month; and in another couple of months, we will be saving almost $650 a month.
I have learned how dangerous credit cards can be, and how the 'cascading method' for reducing debt is sensible and doable. The small amount of unsecured debt we have remaining will get paid off via this method. Once this is done, we can begin again to put money away and build our safety net.
This change of perspective to be more real and responsible brings with it a great sense of gratitude. I am so grateful for the opportunity I have here to learn a good lesson about money management. This whole experience has brought my family to a better start.
Thoughtfully,
Julie L.
Happy Holidays!
(Yes, Already!)
Halloween has just ended and the Christmas frenzy has already begun. I flipped on the radio today and heard Christmas carols on a station already playing them 24/7. Christmas is meant to be a time devoted to family and friends and love and peace. It seems that this time of year increasingly ushers in less of "Tis the season to be jolly," and more of "Tis the season to go shopping!" So what is the true reason for the season? What can we do to not get caught up in the commotion and to make sure the holiday spending doesn't break the bank? Here are some simple tips to help you keep your spending within reason:
The thought is truly what counts. Gifts that come from the heart are the ones that matter the most. What can you give of yourself? Your time is most precious, so give some of it away to a worthy cause or to someone who could use a helping hand or a listening ear. Use your talents and energy to uplift and brighten someone's day. Put together some homemade gifts (whether it be food or a craft) that comes with love and kindness (which are free and priceless) and wrap them up inexpensively with care. Halloween candy (purchased on clearance in November) can be used to augment your homemade gifts, presented on a holiday plate, basket, or tray (purchased at the dollar store).
Be creative! Make a list of those to whom you wish to give, and think of what is needed. Christmastime can be a reason to pick up a gift that you need anyway, as opposed to buying extras that are only nice to have. Don't purchase based upon emotion. Don't be a comfort shopper (to trick yourself into the false contentment of feeling generous) or feel "obligated" to spend your hard-earned money just because it's the holidays. Don't buy to impress. Don't buy lavishly (or at all) for those that you only speak to on occasion. Don't buy because you are worried about what others may think if you don't. Don't be ashamed to tell extended family or friends that you are being a little more frugal this holiday season and encourage them to do the same. Do remember the first tip (being the thought that counts).
Set a Christmas or holiday budget and stick to it. Again, consider the needs of the people that will benefit from your acts of kindness and learn to be a smart shopper by looking for sales and clearance items that meet your needs. Don't make the purchase unless you know for certain that you have found the best possible price because you have done your investigative shopping research. Scour online websites, such as eBay and Overstock.com, and look for sites that will offer free shipping.
When it comes to decorating for the holidays, it's not hard to have the most festive house on the block, even if you are living on a shoestring budget. Planning is the key to your decorating. If you feel you are successful with your holiday trimmings when cars slow down as they drive by your house, then purchase your decorations the week after Christmas for the following year. Visit second-hand stores to see what treasures might be there that you can recycle with a little ingenuity. Borrow decorations from your family, friends, and neighbors that they aren't planning to use this year. Sponge seasonal shapes onto your windows with craft paint (that has been diluted with a squeeze of dish soap—it will come off with some window cleaner). Wrap picture frames with holiday paper and hang them back on your walls, and outline the inside of your windows with lights to brighten your house and your spirits. Scented candles and Christmas music seem to soften the mood and alleviate any holiday-related stress.
Make the holidays memorable and the season special by establishing Christmas traditions that aren't costly and which can involve the whole family. Make decorating, baking, and wrapping a family affair. Find out what makes the holidays special to those you care about and spread the cheer to others. Be the first to start a new tradition that involves your neighbors by creating a goodie plate (that must be passed to another within 48 hours) or a Secret Santa doorbell ditch that can multiply. Create a holiday Santa flier that can be duplicated with instructions to pass on the Christmas cheer, accompanied with an inexpensive treat to two neighbors within 24 hours.
Enjoy the holidays and the spirit of the season. Remember to give from the heart and not just from your wallet. Have fun with family members, create new memories, and try to find creative ways to spread holiday cheer and begin new traditions. Christmastime only comes once a year, but it shouldn't take the whole coming year to pay off your holiday spending.
Prosper welcomes your feedback. Do you have a suggestion for a topic you would like us to address in the next edition of the monthly newsletter, or an idea for a great elective class webinar? Send us an email at newsletter@prosperlearning.com
