How much credit card debt do you have? Did you know the average credit card debt per household, in America, is $15,788. Credit card debt is a major problem in this country. The total U.S. revolving debt (98% of which is made up of credit card debt) is $852.6 billion, as of March 2010 (source: Fed. Reserve’s G.19 report on consumer credit, March 2010).
Interest rates on most credit cards range from 15%-28%, and almost half of those with credit card debt admit to NOT paying off their balance in full at the end of the month. With people not keeping a budget, not living within their means, having to pay on average 21% interest on money borrowed, and only making minimum payments each month, is it any wonder why 13.01 % of credit card holders default? (source: Fitch Ratings, April 2010).
Thankfully, there is a solution. No matter what the amount is that you owe in credit card debt, it is possible to get out of debt, stay out of debt, and build wealth. Below are listed several tips and steps necessary to eliminate credit card debt and restore your credit:
Create a Budget:
Before even mentioning the steps necessary to eliminate credit card debt, it is essential to first establish the fact that you need a budget. You must know how much you earn, and where every dollar is being spent each month. Be meticulous. Keep every receipt, and record and track everything. Ensure that your expenses do NOT exceed your income.
Cut Unnecessary Spending:
Live within your means! Spend less than you make! Cut out those expenses that are unnecessary (i.e. take a sack lunch to work, go out to eat less, get rid of cable, mow your own lawn, make your own coffee in the morning, etc.). You be creative and cut those things you don’t need, and that may mean going without the ‘extras’ that are not necessary but that you think are.
List Your Credit Cards:
Take out all your credit cards and list what the current balance is on each, as well as the interest rate for each card. If you have done cash advances on any, specifically list the amount from that card that was done for a cash advance, and the interest (much higher) for that balance. Also, list what the minimum payments (generally) are for each card. All this info. can be found on your last monthly statement.
Order the Cards:
Now, rearrange and order the cards with the highest interest rate card at the top, and the lowest at the bottom.
Transfer Balance to Lowest Interest Cards:
If possible, the first thing you want to do is take the cards with the highest interest rates and transfer their balances to the cards with the lowest int. rate.
Pay Off Lowest Balance Cards vs. Highest Interest Rate Cards:
Amongst financial advisors there are differing opinions and advice about how to approach paying off balances. One approach is to pay off the highest interest rate cards first, and for very good reason. The sooner you pay the high interest cards the less you’ll have to pay each month, which will allow you to pay off more of the balances quicker on the lower int. cards. However, the other approach is more psychological than financial, in that you pay off the lowest balance cards first so that when you have one card paid off, you feel a mental victory and thus increase your motivation to pay off the others more quickly. Both approaches work, you choose what you think will work best for you.
Make 2 Monthly Payments:
After you have established a budget, determine how much you can pay on each card for that month. Let’s say, for example, that one of your cards has an $8,000 balance and your minimum monthly payment is $200. Instead of waiting until the end of the month to pay the $200, pay $100 in the middle of the month and the other $100 at the end. Doing this actually decreases your total balance by $100 (thus your balance is now $7,900) and you will now only be charged interest on $7,900 rather than $8,000. Doing so month over month will save thousands of dollars in interest paid (between all your cards).
Must Pay More than Minimum Payments:
The ideal is to pay the balance off in full at the end of the month, but I understand many may not be to that point yet. So, because you have ‘cut back’ and established a budget, you should free up some ‘extra’ money; that extra money MUST go to paying off debt, and the more you can pay off in addition to the minimum payment, the sooner you’ll be out of debt and the less you will pay in interest over time. Take every extra dime and use it to pay however much you can in addition to the minimum payment. Whether it’s an extra $20 a month or $100, it will save thousands in the long run.
Pay on Time & Make Your Payments:
Often people overlook the absolute importance of making their payments on time. If you are late in your payment, typically the average late payment fee ranges from $25-39. The reality is that late payment fee gets added to the balance of your card, and now that money is being charged interest, which obviously means you’ll be paying more than $39 over time. Lastly, and this should go without saying, but you absolutely must make your payments also. Never miss a payment.
Never Do a Cash Advance:
There is absolutely no reason why you should ever need to do a cash advance. No matter how tight and tough things get, do NOT do a cash advance. Interest charges on the balance borrowed from a cash advance are substantially higher, and are one of the main reasons why people get into credit card debt troubles.
Ask for Lower Interest Rate:
After you have paid a card off, call the company and request a lower interest rate for your card.
Repeat this Process:
Once you have paid off one card, you take the money you would have been spending on that payment and apply it to the next card, and continually repeat this process until all cards are paid off.
Being debt free is possible. It takes discipline to follow a budget, spend less than you make, resist the temptation to purchase something you don’t need (or don’t have money to buy), and to pay the balance off in full at the end of the month. But it is possible, and to those who have eliminated their debt, they will admit that the feeling of being debt free is incredible.
Understand that having a credit card(s) is not bad (in fact it is almost necessary in our day and age, and is essential to building credit). But, ensure that if ever you purchase something on your card, that you have the money to pay off the balance in full at the end of the month. And once out of debt, never make the same mistake again!
