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4 Steps to Cut Credit Card Debt

When you're in debt, your finances can get overwhelming in a hurry. Just coming up with enough to make your minimum monthly payments on loans and credit cards can push you to the limit.

But you can escape the debt trap. You just have to go a bit further and find some extra money to pay down your debt. Once you do that, it's just a matter of time before you come out debt-free. Here are some easy steps to follow.

Step 1: Prioritize
The first thing you should do is to look at your bills and decide which ones are most important. Monthly living expenses like rent and utilities are mostly non-negotiable, although luxuries like premium cell-phone packages and digital cable are candidates for cutting.

With credit cards, it's easy to see which are important: The interest rates tell you. For instance, here are some recent rates charged by large credit card issuers:

Issuer

Card

Rate

Capital One (NYSE:COF)

Platinum Prestige

7.40%

Citigroup (NYSE:C)

Personal Platinum

10.99%

Wachovia (NYSE:WB)

Personal Platinum

11.99%

American Express (NYSE:AXP)

Blue

13.24%

JPMorgan Chase (NYSE:JPM)

Platinum Visa

17.24%

Capital One

Standard Platinum

19.30%

Source: Bankrate.com.

It's common to see huge differences in the rates you pay to different cards. You could easily be paying twice as much to keep a balance on one card as you do for another. And with rates changing all the time, it's something you have to check on with every monthly bill. Even cards issued by the same bank can have big disparities in finance charges.

Step 2: Negotiate
If you've got creditors bothering you constantly, you probably feel that you have no leverage at all. But in fact, you may be able to get your credit card company to reduce your interest rate, even if your credit isn't perfect.

There are two good ways to cut your rate. The first is the straightforward approach: Call your card issuer, and ask for a lower interest rate. Don't worry: William Shatner won't come after you with a phaser if you don't get the best deal possible. But every little bit counts.

The other way to get a better rate is through balance transfers and other introductory offers. For example, Discover (NYSE: DFS  ) and Bank of America (NYSE: BAC  ) are just two banks that offer 0% interest rates on balance transfers.

If you play your cards right with those offers, you can move credit card debt from one low-rate card to another for months or even years. But be aware -- many banks charge one-time balance transfer fees of up to 3% of the amount transferred.

Step 3: Snowball
Now it's time to start paying off that debt. After you make all your minimum payments, take whatever's left and apply it to your highest-priority debt. In most cases, that'll be the credit card with the highest interest rate.

This is called snowballing, because as you pay down your debt slowly, month after month, your progress will get faster and faster. Every extra dollar you pay means less in finance charges, letting you put that additional savings toward debt reduction. When that first card is paid off, it's one less minimum payment you have to make, so you'll be able to pay off your second card faster.

Step 4: Maintain
Once you get the hang of it, snowballing will start to feel natural. The only danger is making sure you don't get yourself back in trouble. Inevitably, some unexpected expense may threaten your plans. But don't panic. A financial emergency may set you back for a little while, but nothing can stop you from eventually getting yourself out of debt.

Don't let debt overwhelm you. While managing your credit can be difficult, you can get the upper hand on your creditors. With discipline, you'll count yourself among the ranks of the debt-free sooner than you thought possible.

More on managing your credit cards:


Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2010, at 2:48 PM, marilynmorado wrote:

    thank you for the information. wish i had this before i got myself into debt. I used http://www.debtguru.com to get myself out of debt through their online debt consolidation program. i was debt free in under 6 years... I would suggest NEVER getting a credit card to being with!!!

  • Report this Comment On July 28, 2010, at 2:59 PM, zymok wrote:

    Mathematically, it's generally better to apply extra cash to the highest interest rate loan, but practically it's often better to pay off the smallest debt first. There are a couple of reasons for this. First, there's an emotional lift that comes with getting a balance paid off, and this helps maintain motivation to pay everything off. Second, once the first balance is paid off, cash flow improves and there is less need and temptation to use debt when an unusual or emergency expense comes up. YMMV.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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