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9 Ways to Pay Off Debt

You can throw the reminders in the Cuisinart or chuck them into a garbage can, but that won't make the debt go away. Debt hovers like a carrion bird over a dying beast, often costing you more than 18% compounded monthly, month in and month out. You can't wish it away, but you can pay it down with determination, our free How to Get Out of Debt online guide, and the good graces of a few wealthy relatives. Here are nine ways to get out of debt (well, here are two ways, with a link to seven more):

1. Pay more than the minimum.
First, break the habit of paying only the minimum required each month. Paying the minimum -- usually 2% to 3% of the outstanding balance -- only prolongs the agony. Besides, it's precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Don't play their selfish game.

Instead, bite the bullet and pay as much as you can each month. If your minimum payment is $100, double that to $200 or more. Examine your normal expenses -- you can find the money. (For a gazillion ideas, check out our Living Below Your Means discussion board.) Skip eating out at lunch, and bring it from home instead. Eliminate desserts. Give up happy hour. We all have "luxuries," and you know what yours are.

Make a few sacrifices, and you'll find the extra dollars needed to increase your debt repayments dramatically. Those increased payments will save you hundreds, if not thousands, in interest payments. Plus, you'll get out of the hole you've dug for yourself much more quickly. Is it fun? No. But it sure beats living a hand-to-mouth existence, fearing bills each month.

2. Snowball your debt payments.
Take a long, hard look at all your credit cards. Pay particular attention to the one with the lowest interest rate. Have you reached the maximum limit on that card? If not, consider transferring a higher-interest bill to that one. Many credit cards permit this, and it's positively Foolish to trade an 18% debt for one at 12% at any time.

If your entire balance is too large to fit on one low-interest rate card, pay at least the minimum amounts due on all of your cards except one. Funnel the majority of your debt repayments into that one credit card (tackle the credit card with the highest interest rate), and pay it off as quickly as possible. When the balance on that card reaches zero, move on to the next with the same aggressive repayment plan.

Lather, rinse, and repeat. This method of snowballing your payments is aptly called "snowballing." As your debts decrease, the amount of money you have to attack them increases. Your payments snowball until all of your debt is pummeled. Pretty neat, eh?

Another way to transfer higher-interest debt to a lower-interest card is to take advantage of the promotional offers many banks use to entice you to their line of credit. You've seen the come-ons. "Transfer all your credit card balances to us, and pay just 5.9% until June 1, 2007." It could be worth it. Moving to 5.9% from 18% interest could mean substantial dollars to you. And the money saved in interest could then be applied toward the principal each month, thus reducing your outstanding debt balance even further. (For more on how to take advantage of balance-transfer offers, head to step 2 of our free How to Get Out of Debt online guide.)

Take care, though, before you act. Examine the offer closely. Look for the hooks. Will the interest rate after the introductory period be higher than you're paying now? If so, you may have to switch again at that time. That, in turn, could give rise to another surprise. Banks have caught on to the charge card hoppers who switch from card to card to take advantage of the low introductory rates. Many of these offers now stipulate that if you transfer balances from the new card within a 12-month period, the normal interest rate will be applied to all outstanding balances retroactively. That proviso could be a bitter pill to swallow for someone short on cash, and it certainly doesn't help the debt repayment schedule. Read the fine print, Fool. (Or try a spiffy Motley Fool credit card.)

For seven more ways, click into this expanded article -- it's one of the many helpful articles located in our Credit Center. By clicking around the credit center, you can read about what to look for in your credit report and credit industry tricks (just to name a couple). Or if you or someone you care about is mired in credit card debt, learn more in the Credit Center's Get Out of Debt area.

This article, originally written by Dave Braze and published on July 29, 2005, has been updated by Foolish research associate Katrina Chan.


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