How to Eliminate Credit Card Debt

The credit crisis has been a looming issue in our economy for years but has only recently reared it’s ugly head. Debt holders who were approved to borrow more money than what they could afford to pay back are now facing the consequences. As we eagerly anticipate the eventual upturn of the economy, many Americans are left having to reconfigure their spending habits and get creative with their budgets in order to pay back credit card debt that has left them overextended financially.  So the question really is now…

What have we learned from all of this? And how can we prevent it from happening again?

Eliminating credit card debt is a serious task for anyone who has amounted a large balance of debt on a credit card- or multiple credit cards. However, with some will power, dedication and patience credit card debt can be paid off. 

Avoid Negligent Spending
1- The first, and most important step towards eliminating credit card debt is to swear off further negligent  use. This may be difficult for those of us who have multiple credit cards and use them to supplement cash that does not exist. Credit cards should only be used if you have the money to pay back the debt you are creating, or if you need an advance for money you know you will have after the next paycheck. A good rule of thumb is this: If, for example, you want to purchase a new sofa that costs $3,000, you should not charge the cost of the sofa on a credit card unless you are able to pay back the full balance within one to two billing periods.  If you make the mistake of charging the $3,000 sofa and making only minimum monthly payments each month you could end up paying an extra $1,000 for the sofa in just interest (not including late fees and other charges).  Don’t swipe unless you have the cash to pay it back!

As a whole, Americans pay about $15 billion each year in credit card penalty fees according to Treasury Secretary Tim Geithner’s office.

Be Aware of the Extent of the Problem
2- Sometimes when an issue like credit card debt begins to mount a person’s first tendency is to ignore the size of the problem. They go on paying small minimum payments and avoid the “Account Balance” box at the top of their statement. Become aware of the issue at hand and gather together the most recent copies of all credit card statements. Take a look at the interest rates on each card and make a list of the card balances starting with the card with the highest interest rate. Next to each card list the balance and also note the minimum monthly payment. Total up your balances and monthly payments so that you are fully aware of exactly how much credit card debt you have.

Make a Pay Back Plan
3- Now that you have your list, it’s time to create your pay back plan. It’s a good idea to focus on one card primarily at a time. This means making minimum payments on all of the other cards while making more than your minimum payment on just one card until it is paid back in it’s entirety.  A common mistake that card holders make is paying off the credit card with the lowest balance first in order to quickly start crossing credit cards off of the list.  This is not always the best way to reduce your credit card debt however.  Start paying off your credit cards in order of the highest interest rates first (like your list above). This will reduce the interest that you pay over the life of the loan and save you money in the long run.

Now, figure out how much you can afford to pay each month to pay back your credit card debt. If you only have enough to pay back the minimum payments on all cards, you need to re-budget and pull the money from somewhere else. Read our article on How to Effortlessly Save $100 This Month.

Pay Down and Pay Smart
4- When you put your pay back plan into motion, take the card with the highest interest rate and pay as much as you can over the minimum payment ever month.  If you can pay double the minimum payment- do it. Triple? Even better. Then, pay the minimum monthly payments on the other cards. Any time you have any extra cash- send a check towards your highest interest card. Once that highest interest card gets paid off, cross it off the list (a gratifying feeling to say the least!) and move on to the card with the next highest interest rate. Repeat.

Again, paying down the cards in this order will save you from paying extra interest.  The most important step is making a plan and sticking to it. It takes will power- but it can be done.

The Aftermath
5- Depending upon the number of credit cards you have, you might want to make some decisions about what to do with the cards once you’ve paid them off. If you have a high number of credit cards you might want to close a few of the open accounts-preferably those with the highest interest rates.  Keeping a few lines of credit open can be a good thing. Typically, the major credit scoring companies see open lines of credit as a positive thing because it shows them that lenders trust you. However, these accounts can hurt you when your balance begins to creep towards your spending limits.

If you can maintain a few open accounts with ZERO balances you should. However, if you don’t trust yourself not to start swiping again it might be a good idea to get rid of those cards altogether. Remember, credit card companies may approve you for a line of credit- but only you know what you can truly afford.

For more tips from HomeInsurance.com, visit the Personal Finance section of our blog.