Strategies for Dealing with Credit Card Debt, Part 1

Maybe your first credit card burned a hole in your pocket in college. Maybe you charged more than you planned while remodeling your home. Maybe you got socked with unexpected bills. Or maybe you just went really crazy with your Christmas shopping. However it happened, your credit card bills have been getting bigger and bigger. High balances and high finance charges can put a real drain on your wallet and limit your financial options. Worse than that, if you let those balances linger long enough they can keep you from achieving important goals such as buying a vehicle or a home. Here are some strategies to help you get those looming balances paid off.

Getting organized is the first step you should take. Gather up all your credit card information and make note of the balance, interest rate, due date, and minimum payment for each card. How bad is it? Then, determine in which situation you fit.

  • I have lots of balances spread out over lots of different cards
  • I have one big balance and several small ones
  • I have consolidated debt to one card but can’t seem to make any headway on the balance
  • I have been playing the balance transfer game for months and months

Next, add up the minimum payments on each of your credit cards and take a look at your monthly budget. (You have a monthly budget, right? If not, we’ll discuss that in another blog.) Figure out if you can afford to pay more than the minimum payment on one or more of your cards? If you can, get ready to do it!

Strategy: Pay more than the minimum payment each month.
Break the habit of paying only the minimum required each month. Paying the minimum – usually 2% to 3% of the outstanding balance – only prolongs the agony. Besides, it’s precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Don’t play their selfish game! Instead, bite the bullet and pay as much as you can each month. If your minimum payment is $100, double that to $200 or more. Examine your normal expenses. Chances are you can find the money somewhere. If you need help, we’ll give some tips on ways to save in another blog. Increasing your payments will save you hundreds, if not thousands, in interest payments and you’ll get out of the debt hole more quickly.

Strategy: Pay off the balance with the highest APR first.
From a dollar-and-cents point of view, this strategy makes the most sense. With this strategy, you increase your payment on the credit card with the highest annual percentage rate (APR) while continuing to make the minimum payment on the rest of your credit cards. Once you pay off the balance on the card with the highest interest rate, you move on to the card with the second highest interest rate, and so on.

Doubling or tripling your minimum payment on the card with the highest interest rate is a good way to start. Whatever payment boost you can afford, do it and stick with it. If you start by paying $150 on a credit card, keep on paying at least $150 each and every month until the card is paid off.

Be sure to stick with your boosted payment amount even as your balance and minimum payments slip lower and lower. Remember: the aim is to get your balance to zero. Easing up on your payments as your balance creeps lower will slow your progress.

Strategy: Pay off the card with the lowest balance first.
This strategy is a great way to build up a little momentum. With this strategy, you increase your payment on the credit card with the lowest balance, while continuing to make the minimum payment on the rest of your credit cards. Once you pay off the card with the lowest balance, you move on to the card with the next lowest balance, and so on.

It’s quicker and easier to pay a $500 balance down to zero than a $2,500 balance. And it feels good to pay a credit card bill in full, no matter what size balance you begin with. Plus, every low balance card that you pay in full is one less minimum payment that you have to pay each month. By knocking out one or two smaller balance cards, you’ll have more money to focus on larger balances.

Dave Ramsey, author of “Total Money Makeover” and host of the nationally syndicated radio show “The Dave Ramsey Show” calls this the “Snowball Method” and says it works well for every type of consumer. “The only time that you should pay off a larger debt sooner than a smaller one is when you owe the IRS, or if you are trying to stop a foreclosure,” he says. “Other than that, everyone should focus on paying the smallest to the largest debt.”

Strategy: Consolidate your debt to a single card.
If you’re the kind of person who likes things simple this pay-down strategy might be for you. By consolidating your credit card debt to a single card, you have a single card payment to make each month rather than four or five. One card payment to pay each month – that’s it. You can even automate payments so you never have to worry about paying late. Just be sure to choose a payment amount much more than the minimum each and every month so you can make some real progress on paying off your debt.

This payment strategy makes things easy, but it also makes it easy to let things slide. Once you pick a payment amount, force yourself to stick with it. If you’ve tried consolidating your payments already and you still can’t seem to make any headway, try one of the other payment strategies instead.

Next week, we offer more strategies in part II!


Tips for Paying Off Credit Card Debt by Lucy Lazarony,

Nine Ways to Pay Off Debt from the Motley Fool

Six Ways to Pay Off Debt by Dawn Papandrea,

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