By Larry Lane for InvestorZoo.com How would you like to generate 10, 20, or even 30% returns on your money? Sound impossible? Your credit card company is doing just that and they have been for many many years. It is estimated that Americans are in debt to the tune of 972 billion dollars; that's $972,000,000,000. Now that's a lot of zeros! How did we get here as a nation? 2007-972 Billion 2002-769 Billion 1997-555 Billion 1987-169 Billion 1977-39 Billion (Source Federal Reserve) The median US household income in 2008 was $43,200.That puts the level of credit card debt between 5-12% of the average American's yearly income (Source: Federal Reserve). Remember, you don't get to keep the whole $43,200; your federal government gets a chunk, followed by your state income tax, as well as state sales tax which can range from 0-9% of your after take home pay. Here are some common examples we are facing today: Someone with a $5,000 balance with a 16% APR who makes a $125 payment each month would need 4.8 years and will pay $2,000 in interest to pay off the balance. With the same balance and payment at a 25% APR, the debt would take over 7 years and $5,800 in interest to pay. Assuming the same balance, payment and a low APR of 9%, the debt would take 4 years and $966 in interest to pay. This assumes you pay everything in cash going forward and never charge another purchase on your credit card. This also assumes you don't lapse a month, or incur late fees. Remember this is just $5,000 in debt. You probably know of those who owe two to three times that or more. This $125 payment that you're making to pay off your credit card debt should be $125 into your retirement account. As a rule, at just a 6% return, your money doubles every 12 years. This is known as the rule of 72. Divide the rate of return by 72 and that's how many years it will take for your money to double on average. Best of all, this money grows tax free if invested in a 401k or IRA. Take a few minutes and do the math. Are you starting to realize how important it is to be out of debt? Are credit card companies the evil enemy? Not at all. If used properly, credit cards can be a great financial tool. Let's set some ground rules for using your credit card and find out how we can use them to our advantage. 1) Make sure you receive an award for your purchase or toss the offer. When I purchased carpet, I found Lowes had a "we'll beat any competitor by 10%" policy. I brought in a quote from Home Depot, signed up for a Lowes card and received another 10% off. By doing some shopping, I saved over $400 off my purchase and I received 6 months to pay off my purchase interest free. Yes, I did drive to 5 different stores and it took me over 4 hours to do so. However for 4 hours of work, I made $400! 2) If you're smart and disciplined, never pay cash for anything. You won't see that advice anywhere. For example, you've just gone food shopping and spent $200. You reach for your debit card or cash, but then remember that you have a Discover card that pays you 5% off on grocery purchases. Don't have a Discover card? How about using a frequent flyer airline card and getting some free airline miles? Using your rewards card and saving 5% will put $120 annually in your pocket or you'll earn 2400 miles towards a free trip. Use your debit card or pay cash and you'll receive nothing. 3) Never pay late fees. If you have a busy life, make sure you pay your credit card bill the same day you receive it or schedule your payments through your online bank account. If you're paying online, make sure you pay at least 10 days in advance and you receive a confirmation that you've paid in full. 4) I'm already in debt and I'm in trouble; now what? I'm very glad you asked. Everything, including your interest rate is negotiable. Search the internet for a 0% balance transfer offer. Not all 0% balance transfer offers are created equal. Most offers will accompany a balance transfer fee. It is your job to ask about the terms of conditions BEFORE you open a new account or process the balance transfer. The times of getting surprised or seeing fees you don't understand on your statement are over because you're going to be financially vigilant. If you have a low credit score, you might have an issue finding a company to issue you a card. If this happens, phone your current credit card issuer and negotiate your interest rate. I have had firsthand experience extending my 0% interest rate and additional 6 months when I threatened to cancel. In another case, I had my $60 annual fee reduced to ZERO when I again threatened to cancel my account. In this case, it took me 10 minutes to MAKE $60. If you're not late regularly, your credit card issuer may reverse your late charges as well. You must take the initiative and make the call and ask for it. If they decline, tell them you wish to close your account. In most cases, someone from the 'save team' will magically find you a better rate or better terms. Be nice when you ask, but be firm. If you've received a no, simply hang up and call again. Not all agents will go to bat for you equally.
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