Climbing Out of Credit Card Debt

Do you dread opening the mailbox because it’s stuffed with credit card bills? Do you screen your calls to avoid collection agencies’ calls about overdue bills? If so, you’re like millions of other Americans who have buried themselves in credit card debt.

There are various reasons Americans get into debt — loss of a job, an extended illness, not setting a personal budget, or impulsively straying from a spending plan. Whatever the reason, climbing your way out of debt is difficult but definitely worth the effort.

1. How much debt?

How much debt is too much? Generally speaking, limit your non-mortgage monthly credit payments to 15 percent of your take-home pay. That would be a combination of vehicle loans, boat loans, credit card payments and credit union loan payments. Have no more than two major credit cards.

2. Add it up!

It might be a gruesome picture, but you can’t get out of debt if you don’t know how much you owe. Make a list of how much you owe and to whom. Write down the total amount you owe, the interest rate you’re being charged, and the minimum payment you need to make. It may seem overwhelming, but this is the first step to taking charge of your debt.

3. Which balances to attack first?

To quickly pay down your debt, a good strategy is to target the balances with the highest annual interest rates. Some people feel that paying off low-balance cards first is more rewarding since they quickly see progress. Both ways work. Regardless of which approach you use, you’ll become debt-free faster if, once you pay off a credit card, you apply the money you were paying on it to your other credit card or loan balances. When you get to the point of being debt free, apply that same money to a savings account.

4. Pay more than the minimum due.

You just couldn’t pass up the fab evening sweater at the after-Christmas sale two years ago. Such a steal! Chances are, you wore it once. You might have paid a total in finance charges that could have replaced those favorite earrings you misplaced.

To avoid finance charges that end up paying for an item several times over, pay more than the minimum due each month. According to the Cambridge Consumer Credit Index, 47 percent of Americans with credit card debt make only the minimum payment each month. Low minimum payments are a trap credit card companies use to collect interest for years. Fight back. Find ways to pay more than the minimum amount, even if it’s only $20 more. No extra amount is too small. By increasing your monthly payments, you’ll save yourself hundreds, if not thousands, of dollars in finance charges.

5. Restructure your debt.

Consider switching your credit card balances to a card with a lower interest rate. If you choose a card with a low introductory rate offer, try to find one that remains effective for at least a year. Before transferring a balance, ask if there is a fee. A balance transfer fee can often wipe out any interest rate advantage. Or better yet, call your current issuer and ask for better terms. Many credit card companies will adjust your rate downward rather than lose you as a customer.

6. Pay your bills on time.

If you read your credit card agreement, you may find a clause stating that your credit card company reserves the right to raise your interest rate if it finds you have been paying other bills late. Yes, lenders routinely scan credit reports, and if your payment to one company is late, you may find your APR has increased on credit cards totally unrelated to the company that received the late payment. So, pay all of your bills on time.

What about late payment fees? You probably know that credit card companies assess penalties for late payments. But you might not realize that, with some cards, your payment has to be received not only by a certain date, but also by a certain time, such as 5:00 p.m. or the close of the business day EST, in order to avoid a late fee. Check your agreement to see what date and time your payment is due and be sure to allow sufficient mailing time.

7. Protect your credit history.

Remember to check your credit report from time to time to make sure it’s accurate. You can get a free copy of your credit report from each of the three national credit bureaus each year by going to www.annualcreditreport.com. Consider spreading it out by ordering one credit report every four months. The three credit bureaus are Equifax, Experian and TransUnion. Find out more about your credit by reading Liz Weston’s blog at http://AskLizWeston.com

8. Set (and stick to) a budget.

What’s the point in climbing out of debt to wind up mired in financial stress all over again? Learn your lesson and set a personal budget to avoid overspending. You can visit my blog, which has a couple of posts about creating a budget. Another source of information is the Texas Society of CPA’s consumer website at www.ValueYourMoney.org.

It takes time and hard work to pay off credit card debt, but it’s worth it in the end. Those moments of dreading trips to the mailbox and screening your calls will become distant memories. Being debt free is exhilarating. Get started today.