How to Pay Off Credit Card Debt

Many of you ended up on this article because you are saying, “I want to pay off my credit cards.  I need to learn to manage my money and get rid of this debt.” Well you are in the right place.  Teaching you some simple steps to clear credit card debt, or at least how to reduce it, is the goal of this article.  Even if you are facing dire situations like bankruptcy hopefully we can show you how to eliminate credit card debt legally and without bankruptcy.

Credit card debt is a problem that has gotten out of hand in America.  Millions of people are faced with the issue of how to pay off credit cards.  The good news is that paying off credit cards is not rocket science.  There are simple things you can do to learn how to get out of credit debt.

Remember the Goal

When trying to pay off credit card bills the goal is not always speed.  Paying off credit cards fast is enticing, but for most of you it probably took a lot of time to get into debt.  We will discuss how to pay off credit cards quickly, but I want to let you know that is not the goal.  The goal is paying off credit cards, whether that takes two weeks or two years, let your mindset not be speed, but credit card debt elimination.

Credit Card Debt Problems

First we are going to look at some problems people face with debt.  The most common problem with high credit card debt is over spending.  Someone racks up high amounts of unpaid credit card bills and owes far more than they feel they can pay.  Often time’s excessive debt leads to the second problem which is not being able to make the monthly payments.  This leads to your credit score being negatively affected and can then lead to credit card debt collection.

Many times the start of the issue is in college when students use their student credit cards to rack up debt, rather than paying with cash or paying off their monthly bill.  People are still paying for a taco they bought 15 years ago.  They never learned how to manage their financial situation and the snowball effect takes hold.  Before long the debt load seems too much to handle and drastic measures need to be taken.

Credit Card Debt Solutions

There is no ‘best way to pay off credit cards’.  Everyone has a different situation which means there are different solutions for getting rid of your debt.   Here are some solutions to consider.

Start from the Bottom

If you make the minimum payments on your credit cards you may never erase your credit card debt.  The start from the bottom method starts with the card with the lowest balance.  Start applying extra principle payments until it is paid off.  Now take the minimum payment from that card, plus the extra principle you were paying and apply all that extra money to the next smallest card.  Repeat the process once the second card is paid off.  Now you can add that minimum payment to what you were already paying.  Each time you reach a credit card payoff you have more money to apply to the next card and you spend nothing more each month.  This method has helped thousands of people pay down their debt. The major key to this method is the credit card user must stop overspending and stop using their credit cards.

Start from the top

This strategy follows the same concept as the start from the bottom method, but instead of focusing on the low balance cards first you focus on the cards with the highest interest rates.  If you lower your credit card debt starting with the highest interest you will save more money in interest payments sooner.  Once you pay off the highest interest card, move onto the next card using the payment from the first card you paid off as extra principle.

Credit Card Debt Reduction

Both of these strategies will help you pay down your balances with the least amount of extra money spent each month.  They may take some time, but the more time you put into these methods the faster they will start snowballing and soon you will reduce your credit card debt to zero.

Credit Card Debt Consolidation

A debt consolidation program is a process in which you use one card or loan to pay off the rest of your cards.  You will take all the credit cards you have and consolidate them into one.  If you have high interest on your debt, then a consolidation to a lower interest rate could save you money.

If you decide to consolidate your credit card debt there are a few things you should be wary of.  If you continue your bad credit card habits a consolidation will only make things worse.  The best practice is to never use the credit cards you paid off again.  It is also wise to reapply any money you save monthly back into the principle of the new consolidated debt in order to pay it off sooner.

You can do free debt consolidation on your own, or if you feel you need assistants there are consolidation services you can use.

0% Interest Balance Transfers

If your credit score is not trashed, then you might qualify for a 0% balance transfer from one of your credit card companies.  Usually these balance offers last between 6 months to 21 months and can save you hundreds, if not thousands of dollars in interest alone.  This is a better way of consolidating your own debt without using a debt consolidation company and will also save you money on their fees.  The card company you go with will most likely charge you a minimum of 3% of the total balance transferred.

For instance, if you wanted to consolidate $20,000 in debt from 3 credit cards into 1, you would write each credit card company a check for the full amount owed. These checks are usually sent with the credit card offer or you can also send payments over the Internet.  Once the payment is received and the debt transferred to your new 0% interest credit card, you will be charged the 3% fee. This fee would equal $600, on $20,000 of debt, but the interest you will save over 21 months can be thousands of dollars.

Your plan for the next 21 months (or however long your 0% interest transfer last), is to pay off as much of your debt as possible. Since all of your payments are going straight to the principle amount, it might be enticing to keep using your other credit cards.  This is where many people fail and only dig themselves deeper into debt.  If you are serious about paying off your debts, then you need to get rid of the rest of your cards.

Negotiating Credit Card Debt 

What if you are in a situation that you are unable to even make your minimum payments?  There are still solutions for you.  One solution is to negotiate your credit card debt to see your balances reduced.  Negotiations are done through a debt settlement company. Negotiating your debt should never be your first option.  Here is a good list to see if this process is right for you.

  • Are you unable to make your payments for at least 3 months?
  • Did you lose your job and have little to no income?
  • Have you had a medical emergency?
  • Are your creditors threatening you with a lawsuit?
  • Is a collection agency harassing you?
  • Will paying off debt slowly or consolidation not work for you?
  • Are you ready to file bankruptcy?

Before a settlement company will start the credit card negotiations they will determine if you need help paying off your credit cards.  You can set up a counseling session with them, and many companies offer this session for free in hopes you will choose them for their services.

Here are a few steps of the debt reduction/settlement process you can expect.

  1. Prepare a budget with the credit card help company.
  2. Determine the length of the program.  Usually debt settlements can last 2-4 years in order to accumulate savings for debt payoff.
  3. Stop making payments and start saving money. A trust/bank account will be set up and the money used to pay the creditors will be saved for the debt payoff at the end.
  4. Now the settlement company will handle all calls and contact by the creditor or collections agency.
  5. Finally, with your approval, a settlement will be made and the debt paid off.

Credit card debt settlements will negatively affect your credit because of missing the monthly payments.  Also the amount of debt you do not pay off will be considered taxable income by the government.  (Example: If you owed $10,000 and settled on $5,000, the difference of $5,000 will be taxed.)

Closing

Remember the main goal is getting out of debt.  The second goal should be staying out of debt.  Building new habits with credit cards is vital.  Each of these situations could escalate your credit card problem if you do not change the way you use credit cards.  Get out the scissors and good luck.


Clearing Debt the Sensible Way

The economic crisis by now has impacted everyone and the majority of people have way too much debt. While it will take some time to clear all this debt, there are ways to reduce what the debt is costing you.

If you are really interested to clear debt as soon as possible then you may just want to follow these tips to reduce the costs. You may be on your way to that perfect credit score rating sooner than you think.

First you must assess all of your debt to see which is costing you the most. It would seem obvious that the debts incurring the highest rate of interest are the ones you should try to reduce the fastest. Often this is credit card debt, which is usually closely followed by debt on that new flat screen TV or nice lounge suite. Analyze your credit card bill and your other loans.  Ascertain which one is costing the most in monthly interest and work at trying to pay that off quicker.

If you are not in a position to make additional payments on any debts, there are ways to still reduce what you owe. Instead of a lot of small debts you should look to consolidate them into one debt. It may seem obvious, but in their desperation to clear their debt, many people look past the obvious; ensure that the cost of the consolidated debt is not more than the total of all the small individual ones. If it is then consolidate only the ones at a higher rate into the debt consolidation loan and leave the others.

Although it is nice to think of the lower payment each month, this should not be the only factor to consider. Take into account the remaining period on your individual debts. Even if a debt is at a higher interest rate, it makes little sense to reduce the interest by 2% into a 36 month consolidated loan when there is only 6 months left on it right now. Rather leave that out of the debt consolidation and use the money saved on the other debts to try settling that one even quicker.

Remember that there is a cost involved in consolidating your debt – there are fees involved in the new loan and there are often penalty fees for settling existing loans early without giving 90 days notice. Take this into  account when calculating any potential savings. The cost of the debt is not only in the payment, although that will be the major factor in terms of affordability – a loan at 12% over 12 months will cost you more in interest than a similar loan at 10% over 36 months, for example. Always look at the total interest you are paying, not just the nominal rate.