In Focus

Think You're All Set? Not With Debt!

Okay, you've been keeping up with our website, you've bought the book and you've hoarded a small stash of cash to start investing. Before you login to your discount broker to place your first online trade, you electronically pay all your bills, including your minimum payments on your credit cards. Now you're ready to invest, right? Wait a minute, Chicky! What's wrong with this picture? Trust me, I'm happy you're paying your bills and I don't care what method you use to do so, the problem here is that you've got credit card debt! Don't worry, I'm certainly not singling you out. The average American carries a balance of $5800 dollars in consumer debt (i.e. credit card balances). Believe it or not, your best investment, at this point, is not in the stock market, but in paying off those cards.

Personally, I get freaked out by debt. I know some people are just fine with it (my husband, for example). I know debt can be a good thing. Why else would a rich person have a mortgage? Why wouldn't they hand over all the cash up front and be done with it? Of course, it's because of the mortgage interest write-off. Having debt can also help you get credit when you need it, like say, for a car loan. I learned this one the hard way. I'd never owed a dime in my life, which I thought would give me a stellar credit rating. Wrong! I had no credit to rate, apparently. Thankfully, my husband had plenty and we got to drive away in our new convertible.

So now that you've got your car, how 'bout losing those outstanding balances? The problem is less with what you owe, but more about the interest rate you're paying. These rates vary anywhere between 0 and 32%, but the national average people pay seems to be around 18%. Eighteen percent in interest you're paying on your debt. That is huge! Remember, through the history of the market, the average annual return on your money has been 11%. Yes, that's a great gain, but it's not going to help you faster than your debt is going to demolish you. It's like filling the tub while forgetting to plug the drain. You also have to consider the fact that you have to pay taxes on those market gains, which allows credit cards to swallow you even faster.

You've got debt and I'm telling you not to have any. Well, now what? Relax, I promise not to leave you dangling on the debt vine. I've been there and I got out. It can be done, but it takes action -- just like deciding to invest takes action. I was queen of the introductory-rate shuffle, diligently transferring balances from one oh-so-low rate to another just before the expiration date. I'm afraid some credit card companies are on to that little dance now so be sure and read the fine print whenever you're transferring balances, especially for a short period of time. There are fees and stipulations written in there, designed to outsmart you for trying to outsmart them.

The main idea here is to lower your interest rate, so your payments are actually paying down some of what you really owe (the principle) instead of just keeping your head above water paying off the interest. To achieve this, you might try one of two things. Consolidate all of your balances onto one nice low interest rate card (usually between 9 and 12%) or attempt to negotiate with your existing card to lower the rate you're already paying. You might be surprised how amenable they are to the idea. I had an American Express card once (now there's a card that requires you to pay in full every month), and being thrifty as I am I decided to cancel because I didn't like paying an annual fee. I couldn't believe how hard they tried to keep me as a customer. Those other companies don't want to lose your interest either!

Once you're out of debt, you don't have to cut up your cards. If you start paying your balance in full every month, having credit cards is actually quite Chicky. Where else can you get an interest free loan until the end of the month on a regular basis? So go charge! Oh man, what have I done? There you were sitting down at your laptop, all ready to invest and I shout "NO!" and wind up telling you to go on a shopping spree. Put those car keys down and sit back down. I know how frustrating it is to be told you can't do something. Well, how's this for an idea: While you whittle away at your credit card debt, try investing with a sample portfolio. Use pretend money and see how well you'd do. This whole stock market thing takes practice and is certainly an ongoing education. If you're cutting down your debt now, you'll have more money to spend later, on stocks you've really had a chance to investigate and research.