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Key points
- Unpaid credit card balances are the worst kind of debt. Come up with a plan for paying these off, and make it a priority. We offer six steps to get you started.
- Personal finance is confusing enough without a stack of credit cards to track. Your goal should be to carry only one or two credit cards with balances paid in full every month.
Now that you have a sense of "good debt" and "bad debt," you might be worrying about one thing: that you have way too much of the bad stuff! (Or maybe not: if you're keeping the bad debt to a minimum, give yourself a pat on the back.)
If you're like many people, though, you're staring at a big pile of credit card debt that is costing you plenty in monthly payments. Not to worry, though, because in this lesson we're going to talk about how you can pay that debt down, and keep your credit card use under control in the future.
Pay Down That Credit Debt
There are millions of Americans out there who have paid off heavy credit card debt, and now it's your turn to join them. It won't be enough, however, to just make minimum monthly payments. Here are six bigger steps you can take to get your debt under control:
- Stop using your cards. The last thing you want to do with heavy credit card debt is add to it. Take all your credit cards out of your wallet or purse, and leave them at home (though you may want to keep one for emergencies -- and, no, a really great sale or a cool new CD player does not qualify as an emergency).
Cut up the cards if that's what it takes to stop using them. Some people keep their cards out of reach by freezing them in glasses of water.
- Stop the flood of credit card offers. You can force credit bureaus to stop selling your name and address. Dial 1-888-5-OPTOUT to get the forms. If you're searching for a low interest card, don't wait for it to come to you. Visit a site like cardweb.com or bankrate.com to do your own research.
- Always pay more than the minimum. The credit card companies are not just being nice when they require only a small minimum payment on your total balance. They calculate this minimum to extend your payments for as long as possible, to boost their profits. Scrimp if you need to, and pay as much as you can above the minimum every month.
- Plan your attack. Don't just throw yourself at a mountain of debt without preparation. How many cards do you have? What interest rates do they charge? Which have the highest balances? Write down your balances for each card, and their interest rates. (There's space in the workbook for this.)
Generally, you'll want to start by paying off the card with the highest rate first, and then the next highest, and so on. If you want a quick boost, go ahead and pay off a card with a low balance, just to have one paid-off card under your belt.
- Reduce the interest rate. Most credit cards charge anywhere from 16% to 20%, which is huge! But you can negotiate with your credit card company for a lower rate. Particularly if you've had any of your cards for a while, take advantage of being a faithful customer, and call them up to demand a lower rate. Shoot for 11% or 12%. You'd be surprised at how easy it is.
- Consolidate your debts. OK, so you know what the interest rates and outstanding balances are for each of your cards, and you've reduced the rate on at least some of them. Next, consider combining your debts onto one or two of your lowest rate cards, if you've got some credit room on them. (If you're maxed out on those cards, then forget it.) Simply call your lender and ask how to transfer funds.
If you're making payments well above the minimum, have reduced the interest rates on your cards, and have consolidated your debt, then you're in good shape with your credit card debt. We'll discuss additional steps you may need to take for better overall debt management in Lesson Four.
How Many Cards Are Enough?
In the end, your goal is to carry only one or two credit cards, and pay off the balances each month. If you've gotten carried away and have five, six, or more cards, consider the benefits of closing out most of them:
- Simplicity. Fewer cards will be easier to track. In addition, you'll have a much better sense of your overall debt level when it's on one or two cards, rather than spread across a bunch of them.
- Better credit record. You'll want to have at least one credit card to help build your credit history. If you're married, your spouse should have at least one card in his or her name only, for the same reason. Too many cards can hurt your credit rating, particularly if they all have large unpaid balances.
- Less temptation. The more cards you have, the easier it is to rationalize excessive spending. "After all, this card only has $500 on it!" (Never mind that you've got two more that are carrying $5,000 each.) But, remember that your card's credit limits are not like poker bets: you don't have to match (or much less "raise") them. Fewer cards, lower balances: that's your goal.
Summary
We've given you six concrete steps toward getting credit card debt under control. Head to your workbook for some hands-on debt intervention. Hopefully, you share our vision of two credit cards, maximum, with balance paid in full each month. At this point, however, you may be thinking, "Hey, this is all great advice, but you're forgetting one tiny, little detail, like, um...Where am I going to get the money to pay off all of these debts!?"
Of course this is a great question. And to answer it for yourself, we're afraid you're going to have to tackle everyone's favorite, the "B" word. It's waiting for you in Lesson Three.
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