Recent data from the Federal Reserve indicates that the balances on credit cards in the United States increased by $11 billion in the fourth quarter of 2013. Even though the research indicates that many consumers are comfortable with borrowing again, there are some consumers who are more interested in paying down their high interest credit card debt.
One of the big problems with credit card debt is the amount of interest that you pay. That’s money going straight into someone else’s pocket — and not providing you with anything in return. However, paying off that credit card debt can be difficult because of those high rates of interest. Without a good plan, you can spend too much of your money on interest, and not enough reducing your actual debt.
If you are ready to get out of credit card debt, here are the steps you should take:
1. Look for Ways to Lower Your Rates
Gather all of your credit cards, and look at the interest rates. In many cases, a simple call to your issuer can result in a lower interest rate, if you are in good standing. Some credit card issuers empower their representatives to lower rates by up to 5% if a customer in good standing asks. It doesn’t hurt to try.
Another tactic is the credit card balance transfer. If one of your cards has a special rate of 3.9% for a balance transfer, or if you qualify for a 0% APR credit card, you can move your higher rate balances to the lower rate. This will help you improve the impact of each payment that you make. Just make sure you are careful not to rack up even more debt after transferring your balances; it can be tempting now that you have more “free space” on your credit card.
2. Decide How Much You Can Put Toward Debt Reduction Each Month
Once you have lowered your credit card interest rates as much as possible, it’s time to put together a plan. Add up all your minimum payments. Once you know what those amount to, you can determine how much you can put toward debt reduction each month. Experts suggest that the average household wastes between 10% and 15% of its income each month. That is a good place to start. Look for ways to recapture your wasted money and consider putting that toward debt reduction.
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3. Order Your Debts and Tackle Them One at a Time
After figuring what you can put toward debt reduction, above and beyond your minimum payments, it’s time to order your debts. For best financial results, order them according to interest rate, putting the highest-rate debt at the top of your list.
While you pay the minimum on all of your other debts, start with the highest-rate debt and put your debt reduction amount toward that highest debt. By paying more than minimum on that debt, more of your payment will go toward paying down the principal. While you will keep up with the minimum on all your payments, and they won’t be reduced by as much, the impact won’t be as large, since the interest rates on those loans are lower. You’ll keep making small progress on those debts, even as you knock down the debt with the highest interest rate.
Once you have paid off the first debt on your list, move on to the next. Hopefully, if you made your debt reduction payment on top of your minimum payment, you can transfer the entire amount you were paying on your first card to work on the next card. As you progress down your list, the payments get larger as the interest rates get smaller, so your payment is increasingly effective, and your later debts are discharged faster.
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