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Eliminate High Interest Debt

This rule is about as subtle as a sledgehammer, of course. Many of you came to this realization on your own – high interest debt is a terrible idea, and even low interest debts are a terrible idea.

Let’s count the ways.

The higher the interest rate, the more money you lose with nothing in return. Leave a $1,000 debt on a credit card with an 5.5% APR for a year and you lose $55 – not good. But if you bump that amount up to a level that’s typical for credit cards – say, 19.9% – and you’re up to $199 a year. Gone. Poof. Vanished.

The higher the debt level, the more money you lose with nothing in return. So, you have $1,000 debt on a credit card with a 19.9% APR and you lose $199 a year. Bump that up to $5,000 and you’re losing $998 a year. Gone. Nothing in return.

You’re open to late payment fees, over-limit fees, annual fees, ATM fees, cash advance fees, and countless other drains on your money. If there’s a way to ding you, credit card companies will figure out how to do it. A fee here, a fee there, and you’re suddenly watching even more money evaporate for nothing in return.

A required debt payment each month reduces your freedom. With that $5,000 debt above, you’re paying about $100 every single month as a minimum payment. That’s $100 you could be saving for a down payment. That’s $100 you could be saving to start a business. That’s $100 you could be saving for a car. That’s $100 you could be saving towards retiring early. That’s $100 you could be saving towards a great vacation. Your freedom is gone, eaten by the debt monster.

The mere presence of high interest debt often brings other debt into your life. You make a big commitment to getting rid of all of this debt, then start really bearing down on it. You get half of the debt gone, then all of a sudden disaster strikes. You lose your job. Your car breaks down. Your hot water heater leaks water all over the basement. Suddenly, you’re busting out the plastic again to take care of the problem – and you’re right back deep into debt. It’s like escaping from quicksand – if all of your strokes are perfect, you can pull yourself out slowly, but if even one little thing goes wrong, you’re slurped right back in.

In other words, it costs you money, costs you freedom, and puts you into a vicious cycle of even more debt. There are really two prongs to getting out of this trap. Whether you’re avoiding it entirely or you’re trying to escape from the pit of despair, there’s one big first step you must take.

1. Create an Emergency Fund Every little bit helps. Start by calling your bank and asking them to automatically transfer $20 from your checking account to your savings account once a week. Before you know it, within 3 months, you will have saved $250 without hardly noticing it.

2. Contact a debt specialist. We have people waiting to talk to you about your debt if you're in the position I've described above. We know it is overwhelming, and let's face it, you wouldn't be reading this if you weren't in a bind. Click here to contact someone.

Posted by Mark 11 March 2010
Note: For more helpful tips, visit The Simple Dollar