What to Do with Your Credit Card Debt

Credit Card Debt

Credit card debt can be the most difficult obstacle to conquer when it comes to securing your financial future. Credit card companies tempt consumers with attractive promotions to increase credit limits and or by offering pre-approval. This has produced a “spend now, pay later” society and created thousands of dollars of debt for the average American consumer.

Most people overspend because they can charge more than they could otherwise afford and make very low monthly payments on their purchases. With average interest rates falling between 18% and 22%, credit card debt has become one of the most common forms of debts for American families.

If you want to get out of debt, begin by reducing your credit card debt. Read on to learn how.

Stop incurring new debt

It may sound simple to stop acquiring new debt, but for most of us, it’s a very difficult task. Getting off the credit card debt merry-go-round takes a combination of careful debt management and willpower. You must first put away the credit cards and adopt the philosophy that borrowing is no longer an option. Force yourself to get into the habit of only buying items when you have the cash to afford it. You have to start taking steps now to change your spending habits so that you can prevent credit card debt from controlling your financial future. You can retrain yourself to break any habit, and if you break the spending habits that you got you into debt, you won't acquire any more debt than you currently have. Stop making impulse purchases, avoid dining out, and quit buying more “stuff.” Don’t spend one single penny more anything you don’t absolutely need.

Ideas on how to stop using credit cards:

• Lock Up or Destroy ALL Credit Cards:
  If you don’t carry your credit cards with you, you won’t be able to use them. Most experts agree that you should have at least one credit card available for a real emergency, but you need to keep that card in an out-of-the-way place to avoid the temptation to use it in a non-emergency situation. Reserve your emergency card for just that – an emergency. There may be times when a large amount of money is needed immediately. Lock the rest of your cards up in a lock box or bank safety deposit box, or, destroy them by cutting them into small pieces.
• Get in the habit of writing checks:
  You can’t write a check for a purchase unless the money is in the checking account. You are much less likely to make irresponsible purchases if you have to write a check. Writing a check for a purchase will also help to break the habit of using your credit cards.
• Use Debit Cards:
  A debit card offers the convenience of a credit card with one very important and definite difference: you must have enough money in the debit card account, or your purchase will not be approved. When you use your debit card to make a purchase, the amount you spend is immediately deducted from your checking account. You cannot spend more than your available account balance, and you won’t receive a bill at the end of the month, or have interest charges to pay.

Restructure your debt

Sometimes, moving your credit card debts to an account with a lower available interest rate can be an effective and simple debt-reduction strategy.

• Balance transfer
  Consider switching your credit card balances to a card with a lower interest rate. If you choose to transfer your current balances to a card with a low introductory rate offer, make sure that rate remains in effect for at least a year, so that you can pay the balance before the rate increases. You may be able to get your current rates lowered by simply calling your current card issuer and asking for better terms; you’ll be able to avoid the hassle of transferring balances. Many credit card companies will negotiate lower rates to keep you as a customer rather than lose you to another credit card company.
• Home equity loan
  If you own a home, a home equity loan or line of credit is probably the least costly source of credit. Using a home equity loan or line of credit to pay off higher-rate credit card debt means most homeowners not only lower their interest rate, but also change non-deductible personal interest into tax-deductible mortgage interest. Remember, however, if you default on a home equity loan or line of credit payments, you can lose your home. Use this option only if you are comfortable putting your home up for collateral and are sure you can meet the payments.
• Retirement plan
  Borrowing against your 401(k) plan is another option to pay off debt, especially if you're not keen about putting your home on the line. However, it’s important to keep in mind that retirement plan loans usually require full repayment within five years. Additionally, if you decide to leave your job, you'll have to pay back the loan before you go, or the outstanding balance will be treated as a taxable distribution, you’ll be responsible for paying additional taxes.

Prepare a debt repayment schedule

Paying off several thousand dollars or more in credit card debt takes time, but you must discipline yourself to keep to a regular payment schedule. You can also follow the strategies and advice outlined below to ensure your debt repayment plan is successful.

Strategy 1: pay off the card with the highest interest rate first.

To apply this strategy, use all extra, available cash to pay down the balance on the credit card with the highest interest rate first. Use raises, bonuses, and some budget belt-tightening to get rid of this debt. Pay more money toward the higher-interest rate credit card than toward your other card(s). After you pay off the highest interest card, move to the next-highest interest card and continue using this strategy until all your credit cards are totally paid off.

Strategy 2: Pay off the lowest balance first.

To use this strategy, pay off the credit card with the lowest balance first. By paying off the lowest credit card balance, you eliminate debt at a quicker rate, and can increase remaining payments as you decrease your debt. You should pay as much as possible each month in order to eliminate this debt, and always pay more than the minimum required payment. Try to double the minimum payment each month; you’ll be amazed at how quickly the balance will be reduced. Pay extra every month until the entire balance of the first card is paid off. Continue using this strategy until all credit cards are completely paid off.

Whether you use the first strategy or the second, once you pay off the first credit card balance add the minimum monthly payment of the first card to the minimum monthly payment of the next credit card you plan to pay off. For example, if the minimum payment on the first card was $30 and the payment for the second card is $45, then your monthly payment to the second credit card would be $75 ($30 +$45 = $75). Since the minimum payments are already planned in your budget, no additional money needs to be added to your scheduled payments.
Pay more than minimum payments.

It’s tempting to make the minimum payments required each month, but experts agree that making only the minimum payments costs you much more money, keeps you in debt much longer, and is one of the most common mistakes consumers make. By paying more than is required each month, you save loads of money on interest and reach your debt-free goals much sooner.

Pay more than once in a month if you can.

Don’t limit yourself to paying on your credit card balances only once a month. Just because the bill only comes on a monthly basis doesn’t mean you have to pay just once each month. You can pay as often on your credit card balances as you like. Credit cards accumulate interest every day, not just monthly, so paying every dime you can afford will really reduce the amount of interest that accrues. Paying as often as you can on your credit card benefits you in two ways - your overall interest rate will be lower since you are being charged on lower and lower balances, and you can probably afford smaller weekly payments more easily than one large monthly payment. It's much easier to budget a portion of a weekly paycheck for credit cards once a week than it is to budget a whole weekly paycheck once a month.

Consumer Credit Counseling can help you.

If you are in deep credit card debt, behind or late on payments, and creditors are constantly calling you to find out when you are making those payments, there is help available. If your debt is too much for you to cope with on your own, contact the Consumer Credit Counseling Service (CCCS). This nonprofit organization educates and counsels people on the proper use of credit, and will help you get your debt under control. CCCS works with you to set up a repayment plan you can afford to pay off your unsecured debt - credit cards, personal loans, and medical bills.
Consumer Credit Counseling Service does not give you a consolidation loan; rather, the organization represents you and negotiates your interest rates, balances and pay-off schedules with your creditors.

The program is works like this:

A credit counselor is assigned to your case. The counselor works with you to establish a budget. The total amount of your debt is determined. Then, the counselor negotiates with your creditors to either reduce or eliminate your interest rates and late fees, and may be able to help reduce the balances you owe. Using this program can save you 50% to 100% in interest alone. Once all the negotiations are complete, you pay the credit counseling service a weekly or monthly payment which the counseling service then redistributes to your creditors, based on the plan and budget you and your counselor have set up. By working with a credit counseling agency, you will receive assistance with:

• Bringing past due accounts up to date
• Stopping creditor harassment
• Keeping payments current
• Settling seriously overdue and delinquent accounts
• Getting over-the-limit and late fees absorbed