January 29, 2009

Purdue expert offers advice to reduce credit card debt

"When purchases are made on credit, the consumer commits future resources to paying off that debt," says Elizabeth Kiss, Purdue Extension specialist in consumer and family sciences. "If something bad happens financially, such as a job loss or family emergency, and income is already committed to paying for past purchases, that's when the trouble really begins."

The first step to reducing that debt is to take a look at spending.

"Stop charging," Kiss says. "Then figure out the largest amount you can allocate from each paycheck to start paying down outstanding debts."

Kiss also recommended making more than minimum payments, if at all possible.

"It's tempting to pay the minimum each month, but the more money put toward those debts now, the sooner they will be paid off and the less expensive they will be," she says. "If payments are made consistently, progress in reducing debts may be seen in only a couple of months."

For example, if a cardholder has an outstanding balance of $1,000 and a minimum payment of 2 percent at 18 percent APR, it would take seven years and 10 months to pay off the balance. If the cardholder increases the minimum payment to 3 percent, it would cut in half the time it takes to pay off the balance.

Consistent payments also are important because just one late payment can cause credit card interest rates to skyrocket.

"Not only can late credit card payments make that rate increase, but some cards have universal default terms that increase rates if the cardholder makes late payments on any of their bills—including electric, water, etc.," Kiss says.

For those with multiple outstanding credit card balances, Kiss says there are a couple of options for deciding which card to pay down first.

"Some people will start with the card that has the lowest balance so it can be paid off quickly," she says. "Others will start by focusing on the one with the highest interest rate. It's really just a matter of what works best for each individual cardholder."

Another thing Kiss recommends is that consumers consider using part of their tax refund to pay down credit card debt.

"As we look forward to tax refunds, it's never a bad idea to put some of that money toward reducing credit card debt," Kiss says. "But, it's also a good idea to put some of that money in savings for an emergency and of course it is OK to use a little bit of it to have some fun."

Finally, Kiss says it's important to keep an eye on credit card terms. Many banks are changing these terms and, without paying close attention, consumers may not realize it.

"A term change we're seeing right now is that card limits are being lowered," she says. "This means that some consumers who were close to their limits are now automatically over the limit, which often results in hefty fees.

"Just be sure to review the terms often, and if those terms aren't working for your particular situation anymore, it may be time to consider whether or not another card would be better.”

For more information on credit card debt reduction, Purdue Extension offers the free fact sheet, "Getting Rid of Credit Card Debt." It can be found at https://www.ces.purdue.edu/extmedia/CFS/CFS-714-W.pdf .

Writer: Jennifer Stewart, (765) 494-6682, jsstewar@purdue.edu

Source: Elizabeth Kiss, (765) 494-8299, kissde@purdue.edu

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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