The Debt Cycle
Credit card debt is an all-too-common problem, and many consumers easily find themselves in a cycle that seems very difficult to completely break. The reason is that credit card companies have designed their credit plans to perpetually keep their customers in debt, making a lifetime’s worth of payments with relentless interest and fees. The good news is that you can get out of credit card debt through educating yourself about how the system works and formulating a plan that includes repaying the debts and taking control of your finances.
Access Your Credit Card Debt
The first step is to go through each of your credit card statements and calculate the total amount owed. The next step is to figure how much money you can put towards payments each month. Many credit card statements now have charts that compare how long it will take to pay off the debt by only making minimum payments versus how long it will take by paying just a few dollars over the minimum. This is part of new credit card regulations that have recently become law, and the side-by-side comparision shows significant savings in both interest and time. Paying just five dollars over the minimum payment can cut the time to pay off a credit card by as much as three years.
Cut Spending
This step is usually the most difficult; you need to look for areas to spend less in order to have the extra money to put towards the debt. The easiest and most common areas of your budget are entertainment and groceries. Cancel any automatic payments that are on your credit cards, such as those for iTunes or online games. You do not have to give them up; many such online entertainment services take one-time payments from gift cards or credits that can be purchased at many stores. There are many free and low-cost options for entertainment, and there are also simple steps to save on groceries, such as sticking to a list of essentials, switching to store brands, buying in bulk, and cooking at home.
Become Reaquainted With Cash
This is a quite easy measure to keep close tabs on your spending, though it sometimes does not appear as easy in practice. All too often, it is easy to pull out the credit or debit card for small purchases that can quickly add up from week to week. You do not have to cut up your cards or freeze them in a freezer if you feel this is too drastic, at least in the beginning. At the start of each week, withdraw a certain amount of cash you believe you need for the rest of the week. This is to be used on essentials such as gas for the car and other miscellaneous expenses that may arise. Then put your cards away in a safe place at home, such as a locked desk drawer. Once the cash runs out, that is it for the week.
Create a Savings Plan
Some consumers initially believe saving money while still in credit card debt does not make sense, but the point of this step is not to be forced into a position where you need the credit card for an emergency; examples could be a sudden car repair or medical problem. Adding any more credit card debt, even for emergency expenses, equals higher balances and longer stretches of time needed to pay them off. Following the same principle as above-minimum payments, saving even five to ten dollars every month adds up over a period of time.
First Pay the Highest and Smallest
Simply put, this means to pay off the cards with the highest interest rate first, followed by the card with the lowest balance. If one of your credit cards meets both of these criteria, this is an even better situation. Paying off the high balances first will save you the most in interest; make more than one payment on this one per month if at all possible. With this method, you are paying ahead of the time frame that credit card companies use to tack on the high interest percentages to the balance. Once the highest interest balance is under control, start paying off the next smallest balance; this is where you will see the most significant results from paying over the minimum payment.
Consider Consolidation Plans
There are many debt consolidation plans that allow you to transfer multiple balances onto one card with a lower interest rate. It is advised to do your homework first when it comes to this option. Some consolidation plans offer 0% interest introductory rates along with accepting existing balance transfers. Proceed with caution and read all the fine print for these offers; many have hidden finance charges and transfer fees that may negate any savings on interest payments. The best bet with debt consolidation is to transfer all balances into an existing credit card with the lowest interest rate; there is also the added convenience of making one or more credit card payments per month to one credit card company instead of several.
