Eliminate Credit Card Debt in 5 Steps

If you are like many people who have credit cards, you might have overextended yourself recently. Between the holidays, a stagnant economy and maybe even some emergency expenses for which you didn't budget - all of a sudden, you are carrying credit card debt. Even people that understand finance may find themselves in burdensome personal debt.

Interest rates are not what they used to be. Credit card companies are charging a minimum of about 6% interest on balances, with some as high as a whopping 28%! That doesn't even include late fees, rising minimum payments, annual fees, and shrinking grace periods. Gone are the glory days of seemingly "free" money in the mid-2000s.

Finding yourself in credit card debt is not the end of the world. Like any adversity, you need to develop a calm, rational approach. In other words, don't panic - plan!

This hub will tell you how to eliminate credit card debt in 5 steps. Depending on the amount you owe and the number of cards you hold, it could take as little as 6 months, or longer than 6 years. But it can be done.

The first thing you'll need to do to eliminate credit card debt is to get a cold, hard look at the numbers. Many of us that carry credit card balances are too afraid or ashamed to face the facts. Instead, we toss and turn at night and avoid opening bills that arrive in the mail. Ironically, the shame of credit card debt can even push some people to spend even more, in a vicious circle of denial and euphoria.

The psychology of over-spending aside, the cure to your debt headaches is to get real. So pull out all your recent bills and bank statements. You will also want paperwork on auto loans, mortgage statements or your lease agreement, student loans and any other personal debt.  Don't forget items like child support payments or the terms of legal settlements, if any.

Now, get out the calculator, a sharp pencil, a few sheets of paper, and a calendar.

First, add up your total credit card debt on all accounts combined. This will go in the first column. Take a look at the interest rate (expressed in annual percentage rate, or APR) for each card and list them from highest to lowest. Don't worry about the individual balances, stay focused on the APR because the higher it is, the more it is costing you - adding to your debt.

Second, add up your other personal debt; include everything else other than credit card debt. Make a note of the interest rates and required monthly payments next to the outstanding balances. Also include information regarding the remaining months or years on the loans. If possible, take out the calendar and write down the date on which each of your personal loans will be paid off in full.

Finally, examine your bank statements for the past 3 months to get an idea of where your money is going. Write down any unnecessary expenses that could be eliminated and determine if you've been impulse shopping.

If you are serious about eliminating credit card debt, you probably already know that you'll have to send in more than the minimum payment each month. But before you start writing checks, take the information you gathered above and create a realistic budget and plan for getting out of debt.

The credit card with the highest APR is the one you should tackle first. If you have more than one with the same interest rate, pick the one with the smallest balance as your starting place.

After reviewing your monthly expenses and other personal loans and financial responsibilities, make any adjustments in your budget to free up additional cash. Now, total up the amount of all the minimum payments for every credit card other than the one that you will be starting with. Add that to the money flowing out of your bank account each month.

What's left?

Let's say you "uncovered" an additional $60 a month. Take $40 and add it to your minimum payment for the first card. The remaining $20 should go into a no-fee savings account, if possible, which will build up over time so that eventually you can tap into your own money rather than use credit cards for emergencies.

Getting a tax refund this year? You should consider a similar approach, putting 2/3 of the money towards the first credit card (moving to the second card in line if possible) and the remaining 1/3 in savings.

If you still cannot make even the minimum payments for your credit cards after cutting down to the bare minimum expenses, a credit counseling service that can work to lower minimum payments is far preferable to bankruptcy. Remember, however, that you are simply spreading your debt out over a longer period of time. Alternatively, you could consider consolidating your debt, but this often involves another credit inquiry and extension of more credit, as well as the potential of balance transfer fees which simply add to your underlying debt.

Your goal in step three is to completely stop using your credit cards until you are back on your feet. Some people find it helpful to literally freeze the cards in a block of ice or to cut them up. I like the idea of placing them into a safety deposit box at the bank.

Get used to living on cash only. Don't cancel your cards, however, because it will affect your debt to credit ratio. Your credit score is based in part on this number that looks at how much you owe vs. how much credit is still available to you. If you have 3 credit cards with $5,000 credit available on each, but you owe $10,000 on the cards combined, if you cancel even one card, your available credit is essentially gone. You owe 100% of remaining available credit.

In fact, paying off credit cards that you continue to hold will help improve your credit score over time.

Like going on a diet to lose weight, changing your spending habits to eliminate credit card debt is hard work and requires dedication. Be sure to encourage your new resolve by celebrating your success along the way.

Pick an inexpensive treat to enjoy each month you stay on budget, or every time you pay off a credit card. Perhaps you and a friend can barter services - she will cut your hair if you weed her garden. Take a personal day from the office and go for a hike or walk along the beach.  Focusing on free activities to enjoy is a healthier approach and can help you stay on track in the future, as well.

If you have been sending big checks every month to the credit card companies, you need to establish a new budget to account for the additional cash that is freed up once you eliminate credit card debt. I agree with financial experts that advise the money be invested in retirement accounts or personal savings accounts.

First, save up at least 8 months of living expenses in an accessible (liquid) savings account. You need this money in case of emergency so you don't tap into the credit cards again. This will likely take some time. Include monetary gifts, bonuses and tax refunds to help get you there faster.

Next, focus on your future by budgeting a portion of your monthly income for a 401(k) or IRA. If you can max out any matching contribution from your employer, do so.

Finally, create a "fun" fund, as we like to call it at my home. Set aside some of your savings (above and beyond your 8 month emergency savings) for a vacation, a new computer, or fancy coffee maker. In other words, items on which you might have run up your credit cards!

Using cash, checks or debit cards for all purchases going forward will help you prevent overextending your credit in the future again. You should continue to hold several credit cards that have low APRs and/or no annual fees. Make occasional small purchases and pay off the balances to show that you are a responsible consumer that deserves good credit terms when you apply for a mortgage or other loan in the future.

Did you enjoy this article? If so, please leave me a comment below and tell me what you liked best!

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