Making a Plan to Get Out of Credit Card Debt

Being in credit card debt can be a frustrating experience and can be hard to get out of, but it can be done with a debt reduction plan. If done properly you can potentially save a lot of money, get out of debt quicker, and begin working on ways to avoid the credit card debt trap in the future.

The first thing you’ll need to do is make a commitment to stop using your current credit cards, how ever many you have. Any recurring bills or purchases on these cards need to stop and if you are doing it for the rewards programs know that any interest accruing generally wipes out any value these rewards have. There is also no purpose in adding to the balance each month, especially if you only make minimum payments. You can switch recurring bills to a debit card or using a recurring short term loan lender. You do not have to go to the extreme and cut up your cards, although if you are tempted to use your cards you may want to store them in a bank deposit box, or in a place where going to get them gives you time to think about your purchase decision.

Once you have all your credit cards in payment only mode (nothing being billed to any cards) you can begin attacking your debt and paying it down. At this point some people will suggest that you search for a lower interest (or no interest) card to apply for and transfer balances to from your existing cards. While this is not a bad idea, you risk waiting too long for the new card, not getting a high enough limit, or being hit with transfer fees or your application being outright rejected. Right now the last thing you’ll need is another credit card.

So you have your cards and your bills in front of you. You’ll want to look at each card’s current balance, interest rate, and minimum payments. The card with the highest interest rate is the one you’ll want to focus on paying down first but of course you’ll keep making minimum payments on the other cards if any. That said you’ll need to budget your money enough so that you can make a larger monthly payment (as much as possible even if it means cutbacks on spending elsewhere) to the highest interest credit card while being able to keep paying the minimum on the lower interest cards.

This technique is the pyramid technique and works by paying the most each month to the highest interest card as mentioned , then moving down to the next highest interest card when the first is paid off. To be effective you must apply the same amount (or higher) that you applied to the first card to each consecutive card while maintaining minimum payments on remaining cards.

This method works for many people, but there is another method that some people employ if they have multiple cards. This other method goes back to the balance transfer idea mentioned earlier, except you could transfer balances of one card to an existing card that you already have. This can only be done if there is enough available credit on the other card and if the price is right. If you can transfer the balance for less then a 3% fee and it has a decent interest rate or one far lower then the higher interest card then it may be a good thing to do. For example say your one card has 20% interest and another card is only 9% interest, it would be feasible to transfer the balance as long as the transaction fee is less then 3%.

What if you have only one card? Then the solution to your debt problem is to apply as much as possible to that card’s balance each month and also putting extra money such as tax refunds towards the balance if it is high. Contrary to some ways of thinking, draining any savings to pay down credit card debt is not generally a good idea. The problem is that if you drain your savings to pay off a credit card, you may run into an emergency or unexpected expense that you could have used your savings for but instead would have to use credit for, thus adding to your balance and having no savings to show for it.

No matter how many cards you have, you should always make more then the minimum payment. Nowadays some credit cards make the minimum payment as low as 2% of your total balance. With interest rates going as high as 39% for cards in default, and averaging 11-16% for most cards, your minimum payment is doing little more then applying small payments to interest with your balance hardly getting reduced. Credit card companies apply a payment to the interest first then the balance if there is any payment money left over after interest payments. Always pay more then the minimum payment and to get out of debt look to put as much money as you can towards your credit card bill each month or use the pyramid technique if you have multiple cards.