Financial independence is being able to make decisions with your money to do what you want with it, when you want to.  If you’re in debt, your creditors are making those decisions for you.  Thus, one of the first steps towards financial independence is paying off your debt.

People tend to get into the most trouble with debt when they have access to what’s called “revolving credit”.  That is, you ring up debt, pay some or all of it off, then the credit is again available to you.  The typical instruments of revolving credit are: credit cards, and lines of credit.

Of course, when you have credit you’re paying interest on the money you’ve borrowed.  (If not, I’d like to know where you got a 0% rate!)  The worst culprits for getting people into trouble misusing their credit, and charging high interest rates are credit cards.  Department store credit cards can have interest rates approaching 30% interest!  Even your regular Visa, MasterCard, or AMEX likely has a rate around 18-19% unless you have a low-rate card.  (The crux being, to qualify for a lower rate card, you have to have good credit in the first place.)  Lastly, credit line interest rates are commonly tied to prime rate, with a certain percentage added based on your credit risk. (Ex. Bank Prime Rate + 4.5%).

To make things worse, banks and credit card companies often only require you to pay monthly, either just the interest on the money you’ve borrowed, or a small percentage of the balance after the interest has been applied (5% of your balance for many credit cards).  Of course creditors are happy to take your minimum payment since that $500 you charged on your credit card could end up costing you (and thus earning them) much, much more over time!

The moral of the story is: if you only pay your minimum payment, you basically have a snowball’s chance in hell of ever getting out of debt!  So how do you get out of it all?  Fight back with your own snowball!  More on that tomorrow.

Written by Juan William

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