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Make a guaranteed 15% on your Money
Copyright 2005 Steve Hoven
I know that many of us have credit cards with interest rates as
high as 15-20% a year. Here are a few tips on how to lower your
rates and to get rid of them all together.
If you have high interest rate credit cards and have a decent
credit score, you can do one of two things to help reduce your
interest rates. One is to call your credit card company and ask
them if they will drop your rates (I have done that myself and
it does work. It doesn't work every time but it could be a phone
call worth $100's for you). In many cases, they will drop your
rates for a short time. For example, if for a year, the credit
card company drops your rates from 15% to 5% and you have a
$5,000 debt, that is a great savings of $500 in interest for the
year. This will free up some money for you to pay off the debt
quicker. If a credit card company isn't willing to work with you
and drop your interest rates, look for a better interest rate
credit card. Just watch out for balance transfer fees, etc. Each
situation is different but there are millions of people who are
throwing away billions of dollars a year in interest because
they either don't know that they can get a better rate or they
don't know how to ask for one. It is really as easy as picking
up the phone and asking your credit card company for a better
rate.
I don't recommend using credit cards, of course. However, I know
that many people do have credit card debt. By either calling the
credit card company to get a lower rate or by looking for a
credit card with a lower interest rate, you can cut down on your
debt.
If you don't have the best credit and your credit card company
isn't willing to work with you, and you can't find a credit card
that offers a better rate, consider suspending any of your
current investing and focus your attention on paying off your
debt. For example, if you had a $5,000 credit card debt at 15%
interest paying that bill off is like getting 15% on your money
tax free and with no risk.
What do I mean? Well, if you had $5,000 in credit card debt at
15% interest over the course of the year you would owe $750 in
interest. ($5000 x 15% = $750). So the total amount that you owe
is now $5,750. Let's says you also happened to have $5,000 in
the bank and instead of paying off your credit card, you just
invested it. So you invested in the stock market or mutual fund
and during that year the stock market had a decent year and you
earned 15% on your money (Historically, it averages about 10% a
year). So you made $750 in profits off of your $5,000 investment
in the stock market/mutual fund. You then open up your credit
card bill and the amount is $5,750 as well. This time you so
decide that you want to pay off your credit card, even though
you could have done that last year when the balance was $5,000.
Well, now you sell your investment in the stock market/mutual
fund. You pay $50 in commissions to your broker and 20% to the
government for taxes ($150). So your net earnings are only
$5,550, but you have a bill of $5,750. Even after you pay all
the money you just got out of the stock market/mutual fund you
STILL owe the credit card company $200 more (Of course that is
just an example and those figures could change, etc.).
The point is that paying off credit card debt is the best
investment that you can make. It is a GUARANTEED return, and you
don't have to take taxes out of it as you are just paying back a
debt. The above example showed a 15% profit in the stock
market/mutual fund. What would have happened if the investment
only went up 5% instead of 15% or what if it went down 15%? You
would be in an even a bigger hole. In the example above you
would have needed a 20% return in order to pay off the credit
card in full after commissions and taxes. That is double the
average return for the stock market. Historically, that is
asking a LOT when you could just have paid it off from the
beginning and not have to deal with the stress of the debt.
I always suggest paying off personal debt (which includes credit
cards, automobile loans, furniture loans, personal loans, and
student loans) prior to investing money in the stock
market/mutual fund.
About the author:
Steve Hoven, has many years in the financial industry. He has
started a financial newsletter that you can subscribe to for
Free. http://www.biz4christians.com
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