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investing fundamental #2 – credit card debt

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OK, let’s dive right into it.

This is my #2 investing fundamental – carry no credit card debt.

The average American household carried a $7,400 credit card debt in 2010. If you carry any credit card debt, forget about doing any kind of investing and pay it off first. There is very little chance that you can overcome the interest rate with any kind of investment. Anything that can net you enough to overcome the interest rate is bound to be too risky.

This is the agreed upon first step to investment in any magazine, blog, financial consultant, and I totally agree with them. I was lucky and never carried credit card debt for long. Once I carried 10k for 6 months with 0% interest and paid it off right away after the rate increased. That was early in my investment career and I thought I could put 10k in stock and bag any gain that was made in 6 months. I don’t think I made or lost much money, but looking back on it I can see it was a bad decision. The gain was not worth the risk.

If you have any credit card balance, it’s best to pay off debt first before investing. There are many resources on the internet to help you figure out what to do, but the bottom line is start working on it right away and spend less than you make. Debt Avalanche and Debt Snowball are two popular debt reduction methods that you can try.

Transferring credit card debt from high to low %APR is also a good short term option. It will save you some money, but you still need to work on bringing the whole balance down.

How much can you save?

The reason this is #2 for me is because I have a more important #1. I will run through #2 to #10 first and then reveal my #1 secret. I have to keep you coming back right?

retireby40’s personal strategy

– pay off your credit card every month

– you can have a number of credit cards, but only use one or two.

– give yourself a cash allowance and use it to buy everyday things. You spend more money if you use credit card instead of cash. This is true, read cash vs credit.

make a budget if you have credit card debt

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{ 4 comments… add one }

  • Freddie @ Real Estate Investing October 12, 2010, 5:43 am

    I had my credit card debt under control, but my business had to close and income took a crazy hit. Still working out from under the rubble, but getting it going. It is my desire to eliminate my credit card debt as soon as possible. I have been under it far to long….well, I will say consumer debt all together. Got a furniture loan and appliances.

    Thanks for the push!!

  • retirebyforty October 12, 2010, 4:23 pm

    Good luck with the credit card debt. The big problem with credit card debt is the high interest rate that the bank can jack up anytime they want to. At least a car loan interest rate stays the same. There are always bumps in the road, but you just have to keep going.
    I subscribed to your blog, I would love to learn more about real estate investing!

  • Lisa @ Cents To Save October 12, 2010, 5:51 pm

    I have credit card debt, but am working to get through it. I would like to eliminate All debt withing the next two years and then get started on the mortgage. And yes, you are right, I should cancel my cable. …… Yep…. I should…. hmmm.

    • retirebyforty October 12, 2010, 7:06 pm

      Good luck with your debt. There are many sites to help you deal with it.
      Yes, try canceling cable for 3 months and I bet you won’t renew. You can catch a tons of shows on the internet these days.

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