Wednesday, January 2, 2013

If your mailbox looks like this!

If Holiday bills are arriving in the mail and they are causing you some post Christmas blues, it's now a perfect time to review your credit debt. The way you are financing your revolving credit purchases maybe costing you thousands annually. Many consumers pay little attention to the way they choose to finance small ticket items. Christmas provides the right avenue to overspend and make poor financing decisions. The most common poor decision is to place a purchase on a retail store issued credit card. Most retail operations charge on average 28% interest rate. These rates will extend the length of time it takes to payout the debt as more of your payment will go towards interest. Another common mistake is failing to plan. Many people place Christmas purchases on a credit card because they failed to plan to save in the first place. Christmas is an expensive Holiday; we are all mindful of it and therefore should plan to save for the occasion. At Leading Edge Credit Union, we have a super savings product that automatically withdrawal funds from your bank account and places it in this special savings product. This forced savings plan is great, and allows for an accumulation of funds for when you need it.
It's simply time for a financial checkpoint! Many people ask me questions around paying down debt versus savings, etc. Every situation is unique and different, and most commonly I advise to pay down your high interest accounts first. This may mean that you will have to start fresh with a personal loan to reduce your interest rate on your debt. Once you restructure your debt in a new product it is very important to remove access to future credit with the high interest provider. There is no need to have a retail credit card or multiple credit lines if you have a savings plan. With a new restructured loan, develop a savings strategy to place funds aside for those purchases you know are looming in the future. I find the super savings account great and open one every year to fund my Christmas purchases.


$5000 loan over 5 years
 Here is an example of how much interest you could save by restructuring your debt. This example showcases how restructuring $5000 over 5 years using three different interest rates. The Blue column is the typical retail store credit card and indicates that $5000 would cost you approximately $4513 in interest over 5 years. The Red column is reflective of the average financial institution credit card and indicates interest charges of $2782 over 5 years. The green column showcases a typical consolidation loan at 9% which would cost about $1227 in interest charges over 5 years. If a consumer chooses to pay off a retail credit card with a balance of $5000 via a consolidation loan at a 9% interest rate, they could save approximately $3300 in interest charges. As stated above the key to making such a decision is to then set up a savings plan and remove access to high cost of credit products.


If you are interested in starting fresh and restructuring your debt situation give your local credit union branch a call. The savings are immediate with a simple phone call! I should also advise that in this example, in order to pay off the loan at 28% in five years a payment would be $159.00, compared to $103 on a consolidation loan!

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