Debt repayment is a major expense for many families. Some people spend a day’s pay (or more) per week repaying car loans, credit card bills, and other debt. Not only is this expensive, but the payments are unavailable for savings or other expenses. Below are a some tips for smart borrowing:
1. Visit www.powerpay.org, and do a PowerPay analysis. This computer program will help accelerate debt repayment by printing out a repayment calendar that adds monthly payments from paid-off debts (e.g., Sears credit card) to remaining debts (e.g., MasterCard), resulting in hundreds, even thousands, of dollars of interest savings.
2. Borrow as little as possible by making the largest down payment you can afford (e.g., car). When car payments end, continue making the previous monthly payment to yourself to build up a down payment for your next car.
3. Shop for credit, just like other purchases. Compare at least three credit issuers (e.g., banks) for the lowest annual percentage rate (APR) and fees.
4. Separate borrowing decisions from purchasing decisions. In other words, don’t just accept the financing arrangement offered by a merchant (e.g., car dealer or furniture store). Shop around.
5. Pay credit card bills promptly to reduce the average daily balance on which interest is charged. Avoid cards using the two-cycle average daily balance calculation method because it generally increases finance charges. The balance on which interest is charged is the sum of the average daily balances for two billing cycles.
6. Limit credit card cash advances. The interest rate is high because most creditors charge interest from the date money is borrowed, along with transaction fees (e.g., $2.50 per advance) and a higher interest rate than for purchases.
7. Transfer balances on high-rate credit cards to those with low six-month “teaser rates.” Try to pay off the balance before the low rate expires, or seek another low-rate card.
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