| How to Pay Off Credit Card Debt Nov 23rd 2012, 20:00 Long after the ghost in your basement gets bored with hiding your favorite slippers, your unmanaged credit card debt will continue to haunt every step you take. It may sound like a daunting task, but it can be done with order and dignity! To attack your debt effectively, use the following strategies. - Make more than the minimum payment. Credit card companies love it when you pay just enough to get by every month because, at that rate, you're mostly paying off interest and barely scratching the surface of your actual debt. Look at your most recent credit card statements to get a ballpark figure on what your monthly interest is, then budget as much of a payment as you can over that amount to actually see a difference in your statement. Of course, you might want to tweak your approach if you have multiple credit cards.
- Talk to your credit card companies. Explain your financial situation and ask if there is anything they can do to help. Many will lower your interest rate for a period of time and/or waive current late fee balances, to give you a better opportunity to catch up.
- Develop a payment plan/budget for yourself. It isn't enough to just throw a random payment at your credit card(s) every month. Instead, create a strategy, put it in writing, and budget your other expenses around your credit card payments. There are two main schools of thought on how to tackle your debt:
- Tackle high-interest debts first. If it eats you up that you pay 18% interest on one of your credit cards (as opposed to, say, 12% on another one), make the biggest, most aggressive payments you can on the high-interest card first. Sure, the other one will accumulate interest in the meantime, but since you're paying interest either way, you might as well do it at the lower percentage.
- Snowball your debt. If your interest rates are all roughly the same or you're simply overwhelmed by the sheer number of payments you have to make each month, make the minimum payments on all but the lowest debt––which you should attack aggressively so that it disappears quickly. Once it's gone, add the payments you would have paid on the lowest debt to the minimum payment on your next-lowest debt until it, too, disappears. Repeat until all debts are cleared. The sense of satisfaction you will feel in making fewer and fewer payments each month will make the process more bearable and help you achieve your goal.
- Move your debts around. Though transferring money from a credit card with 12% interest to a card with 0% interest may damage your short-term credit, barely chipping away at your debt because your interest is so high will damage your finances in the long term. Shop around for long-term, low- or no-percent interest rate transfer opportunities, or look into transferring some of your debt onto a low-interest card that you already have. Keep the following in mind:
- How long the low interest rate will last. Depending on your total debt and how quickly you think you can pay it off, 0% interest for six months may not be as good a deal as 2% for 18 months.
- The amount of the transfer fee. When transferring, you usually have to pay a certain percentage of your debt up-front. Make sure that a) you can afford this transfer fee and b) the fee is less than you would have paid in interest during the introductory period. Usually, transferring to a low-interest card will involve less fees than transferring to a no-interest card. Weigh how much time you expect it will take to make a dent in your debt when choosing to transfer.
- What the interest rate be after the introductory period ends. Will it jump up to 18% after 12 months? If it does, will you have paid off enough debt by that time to make that jump worth your while?
- How long you will be required to keep your balance with the company. Since credit-card hopping has become a popular way to avoid paying interest, some companies have begun stipulating that if you transfer your debt to another card before a certain amount of time has passed, the normal interest rate will be applied to all your previous balances retroactively, leaving you with a huge new debt.
- Make sure to read all the fine print! Credit card companies are nothing if not resourceful in finding ways to take your money. Look for all the catches above and more before making any decisions.
- Sacrifice a small luxury (or three). For example, don't buy that coffee on the way to work every day; make one at home for a fraction of the cost. Don't buy your books, DVDs, or CDs; just borrow them from your local library. Don't buy lunches for work; just make them at your home. (Pressed for time? Even something as simple as a sandwich or a salad with a hard-boiled egg would make a great lunch. Prep it the night before if necessary.)
- When you're stressed, treating yourself to the little things can feel like a necessity, and to a certain extent, it is. However, there are much cheaper ways of going about this. Instead of waiting in line for an overpriced mocha, bring a thermos of tea to the park and watch the autumn leaves fall. Instead of going out to dinner with your friends next Friday night, invite them to a potluck at your place. There are plenty of creative ways to cut back without feeling like a Spartan.
- Build an emergency cash fund. Credit cards are often our go-to resource for unplanned expenses (the alternator dies, you get sick and miss work, etc.), but this can undo months of payments and completely demoralize you. A better idea is to tuck some money aside strictly for emergencies.
- This doesn't have to be a drain on your income. Remember those expenses we told you to cut back on? Instead of simply not spending, try actually setting aside the money you would have paid on one or two of those expenses (for example, bar money every Friday night, manicure money every other Sunday, etc.). Create a (free) savings account, put it in a CD, or even hide it in a cookie jar.
- Remember that this fund is for emergencies only. Break your leg? Go ahead and dip in. Want to upgrade your phone? Find the money somewhere else.
- Track your spending. It's one thing to make mental notes of things you've bought over the month, but it's another thing altogether to see them add up on paper. This is especially true if you use a credit or debit card (people tend to spend more freely if they pay with plastic) or pay for things using multiple accounts (and therefore never really see the net total). Manually tracking your expenses will not only help you make better decisions, but also identify areas in which you don't even realize you're overspending.
- Don't reward yourself for your hard work. Once you start to see that credit card balance go down, you may be tempted to treat yourself to a series of restaurant outings or a shiny new iPhone. Don't do it; a few casual purchases can put you right back where you started, especially if something unexpected happens. Keep the end goal forefront in your mind––rewards that cost little or nothing are much better, like seeing a movie at a friend's house or making your favorite rich chocolate dessert and eating it all!
- As a last resort, stop using your cards altogether. Freeze them in a block of ice if you need to. Hanging a sealed bag of water with the cards inside is a fun and mess-free way of doing this. Or, you can take your cards and cut them in to pieces with scissors to make sure you won't use them again.
- Give not using cards a chance. You may find you how much more free you truly feel, knowing that everything has actually been paid for!
- Use a debt calculator to help you pay off your credit and to keep track of your budget.
- Consider seeing a credit counselor. A credit counselor can analyze your finances and help you come up with a workable budget and debt repayment plan.
Edit Warnings - Credit is not the tool you think it is. Remember that credit card companies are in the business of making money. Adopting a "Cash is King" policy will go a long way in stopping your dependency on credit.
- Beware of debt consolidation companies and credit counseling companies who do not provide any service other than debt consolidation. If you are considering entering into a debt consolidation plan, you may want to see a bankruptcy attorney first. He or she can analyze your debt and determine if debt consolidation is a good choice for you. An attorney can also review the debt consolidation contract and make sure that it is a legitimate company.
Edit Related wikiHows Edit Sources and Citations |  |
No comments:
Post a Comment