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Credit card debt - To pay or not to pay?

Being in credit card debt is very stressful for most consumers. Many people are all too familiar with the idea of watching one's debts pile up, getting late payment notices and perhaps even calls from debt collectors. It's a difficult situation to deal with.

When a person receives a sudden windfall, then - a bonus at work, perhaps - it's only natural that they would rush to pay off all those debts immediately. But financial advisors say consumers shouldn't act so quickly - stop and think for a moment before writing the check.

On the face of the problem, paying off all credit card debt seems like a great solution. After all, interest rates on credit cards average around 12.76 percent, whereas most investments will produce only 1 or 2 percent. It seems much cheaper to pay off the credit cards than to invest the money.

It is indeed cheaper; however, unless the consumer stops and thinks about what got them into debt in the first place, they are likely going to end up in the same situation a few months later. What good is it to pay off one's debts if one doesn't stop the behavior the created it?

Consumers should stop and consider their situation and their behavior before paying off the debt. Draw up a budget, and stick to it. Many consumers have success by going "cardless" for a while, and making all transactions with cash or debit cards.

During this time, consumers may want to transfer their debt to a zero interest rate offer and pay off their debt over time. This will allow consumers to get comfortable with their new budget while still maintaining enough savings to deal with sudden emergencies.

Of course, not everyone suddenly receives a bonus or a hefty commission when they need it most. In many cases, consumers can still benefit from reevaluating their financial lives, but it may be too late to work one's way out from under the debt. In these situations, consumers may want to think about bankruptcy as a way to eliminate one's debt and start over with a clean slate.

Source: Forbes, "When Not To Pay Off Your High-Interest Credit Card Debt" Nancy Anderson, Oct. 11, 2013

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