In 2009, the Federal Reserve calculated that the average household has over $7,000 in credit card debt. Those people who barely make the minimum payments each month are likely to be paying on these cards for what could seem a lifetime. However, you can get out of credit card debt. You just need a plan and the determination to make it happen. Use the seven step plan outlined below to get control over your credit cards, and eventually, to build better credit.
Step One: List your accounts
The first step is to create an organized account of all the credit card debt you owe. If all your debt is on a single card- you are done with step one after you list those items. If you have more than one card make a simple chart (of a fancy excel spreadsheet) that lists your account holder, their contact number, total amount due, minimum monthly payment and interest rate. Then total up the amount you own on all credit cards combined.
Step Two: Call your account holders
Now that you have all your credit card information in front of you, take a look at the interest rates you are paying. Call each creditor and attempt to negotiate a lower interest rate. While you have them on the phone find out about the possibility of transferring other higher interest cards to them. Is there a transfer fee? Ask them to calculate your monthly savings if you transferred higher interest cards to them.
Step Three: Consolidate, if wise
You will only consolidate your higher interest cards onto a lower one if it makes sense. The company should be able to give you the exact numbers of how much you will pay to transfer the amount. If your interest rates on multiple cards are so close it just doesn’t make sense then don’t bother.
Step Four: Create a payoff plan
Now you either have your list of multiple credit cards to pay off, or a newly consolidated credit card to make payments on. If you have a list of many cards then you need to make a decision. Is your highest interest card and your lowest amount owed card the same one? If not you will need to decide whether to pay down the high interest or the lowest amount owed first.
You should know that paying off the card with the highest interest first makes the most sense financially. This is because it accrues more interest and therefore costs you more money every month. So why would anyone choose to pay off the low amount card?
You can decide to pay off your credit card on which you owe the least if you need the emotional boost. If you are so down trodden by the overwhelming debt, this sense of accomplishment can be very empowering. Different financial gurus give advice both ways. So you must decide what you need to do.
Here is your plan. Each month, you will put as much money as you can towards paying off that card you identified as Payoff Card Number One! Return bottles, roll change, get a part time job and do whatever you can pay this one down. Your goal now is to pay off that card as fast as possible. Of course, you will continue to pay the minimum on your other cards and all your essential bills.
Once that Payoff Card Number One is paid off you will put the amount you were paying on that toward the next highest interest, or lowest amount, card you have identified. Financial author and TV host Dave Ramsey calls this a snowball method of paying down your debt. Each time you pay off one credit card you end up with more money to pay off the next one even faster. Can you see how diligently sticking to this method will work?
Step Five: Pick a card for emergencies
You’ll notice that the advice is not to tear up and cancel all your credit cards immediately. (If you simply can’t stop using them, by all means freeze them, tear them up, or send them to your mother-in-law to keep for a while!) However, canceling all your credit card accounts can actually have a negative impact on your credit score. Ironic as it seems, the only way banks and lenders know that you can manage your money if for you to prove it by taking out and paying loans promptly.
Also, many credit card companies will actually cancel a card that has not been used for a long time so you do not want to stop using your credit cards all together but rather just use them for very small purchases and pay them off in full every month.
Besides, the truth is that it is very difficult to book a hotel or rent a car without a credit card in out world today. So select one card at a great interest rate and set it aside for emergencies or for booking hotels rooms and things like that. If none of your current cards have decent rates, then you will simply look for one at a great rate when your current debt is paid off and your credit score is higher (click here for information on getting free credit reports along with credit monitoring).
Of course, during all this you will need to refrain from spending money you just don’t have. Focus on your goal. And keep in mind that your high debt is a temporary situation. You will have control over it soon.
Step Six: Rebuild your credit
Once you have paid off your credit card debt, you are going to feel great! Now, your credit score might have taken a hit if you missed any payments before you started on this six step process to paying off your cards. To ensure that you will never end up in the same situation be very conscious in your credit management decisions from here on out.
If you do decide to keep a credit card for emergencies or to help rebuild your credit, select it carefully. Use a comparison tool like the card “Chaser” to get great interest rates. If you choose a reward card then select it on the shopping habits you already have, and look for reward cards that will actually save you money.
If you are still unsure of your ability to own a credit card without overspending, then look into a secured credit card.
Finally, commit to paying on your credit card bills as soon as they arrive. If you can’t afford to buy an item with the cash in your bank account today, then you can’t afford to buy it. You can pay off your credit card debt, and you can learn to utilize credit card as a credit management tool, rather than as a compulsive shopping buddy.
Step Seven: Find a great card
Credit cards used properly can actually help you to save money. If you choose a cash back credit card or a rewards credit card and simply pay off the balance in full every month then you will be in great shape. Click to get started comparing the best credit cards now!
