How to Get Rid of Credit Card Debt

Feeling overwhelmed with credit card debt? You’re not alone. Revolving credit card debt in the U.S. was calculated by the Federal Reserve to be $880.5 billion as of July 2014.  For those people who carry a balance from month to month on their cards, the average balance was $15,607. Seem like a lot? When you consider that the average U.S. annual wage is $51,439, it does. Is there a way out of this kind of debt?

Assess your Current Situation

There’s only one way to start cutting debt and that’s to face your situation and see where you stand. An easy way to get a good picture of your debt is to pull your credit report. Most, if not all, of your accounts will report to the credit bureaus and will therefore be listed on your report. You can get a free copy of your credit report your credit report at annualcreditreport.com. If you don’t want pull your credit report, gather all of your credit card statements.

Once you have your accounts by either method, pull out paper and pencil or create an electronic spreadsheet. Besides each debt, put down the minimum payments and the interest rates for the cards. This will give you a good idea of where you stand and give you a glimpse into your cash flow to possibly start formulating a budget. Once you have a clear vision of your debts, you can begin strategizing.

Stop Charging on Your Existing Cards

Stop the bleeding now! Resolve not to charge anything more your cards. Cut them up if you need to — it may help you to avoid temptation. Use your debit card or only use cash until you get out of the hole you’re in.

One note: while it’s a good idea to stop using your cards, it’s a bad idea to close out the accounts. Closing accounts can have a negative effect on your credit. Your credit score is made up several factors, one of which is length of age of accounts; another factor is credit utilization. Age of accounts makes up 15% of your score and closing out your accounts, especially if you’ve maintained them for many years, could hurt you down the road with regard to your credit score. Your credit utilization is the ratio of what you owe divided by your credit limits. By closing accounts — especially those with large credit limits — you will immediately, and possibly dramatically, increase your credit utilization ratio and therefore lower your credit score, and that’s something you don’t want to do. Any number above 30% credit utilization can lower your score.

Always Pay More than the Minimum

Credit card companies make their money by charging interest on cards so they set your minimum payment in a way designed to keep you in debt and paying interest as long as possible. If you only pay the minimum, credit card balances can take years to pay off.

For example: if you have a balance of $3000, with an interest rate of 18.9%, paying $50 month will take you 176 months to pay off the balance.   In contrast, if you pay $77.66 every month, you’ll pay off the balance in 60 months.

The law states that minimum payments must be set so that principal as well as interest will be paid with each payment, meaning there can be no negative amortization. The law also requires that credit card companies put into each statement the amount of time it would take to pay off the balance if only the minimum was paid and how much faster you can pay down the balance by paying more than the minimum.

Credit card minimums are calculated as a certain percentage of the credit card balance and typically run between 1 to 4%. Credit card minimums change each month due to changes in both your balances and the sometimes very fluid terms of credit card agreements. Credit card companies must give 60 days notice before they can change interest rates, but other terms such as minimum percentage of balance due can be changed without any notice.

Ask for a Lower interest Rate on Your Cards

Pull out your sheet of debts with the amounts and interest rates. Take note of anything with an interest rate over 15% – this is too high. It makes the most sense financially to pay off credit cards with the highest interest rates first, but let’s see what you can do about those interest rates. See if you can negotiate your interest rates down. If you’ve been a good customer, one who pays on time and has made the company a little money, ask for a reduction in rates. All it takes is a call to customer support.

Using our earlier $3000 credit card debt example, lowering the interest rate on this card from 18.9% to 13% would cut the minimum payments from $77 to $68 over a 60-month period. This means you can pay off your debt in a shorter amount of time; if you continued to make the same payment of $77 (just $9 dollars over the new minimum), the repayment period would go down from 60 to 51 months.

Avoid Debt Consolidation

A debt consolidation loan could sound like a good idea as it could lower your monthly payments, but the lower payments could result from merely stretching out the repayment period. Short term gain can mean long term pain. If you refinance a car loan and stretch out the terms from 5 to 7 years, your payments will go down. However, your overall cost in the form of extra interest will increase because the loan will be accumulating interest for those extra two years.

An option some people choose is to take out a home equity loan as part of a debt consolidation strategy. While the lure of lowering your monthly obligations can sound good, you are now turning that unsecured debt obligation into a secured loan; you are putting your house on the line for a charges you made on a credit card like dinners and clothes. Moreover, if you don’t change your spending patterns, you may find yourself running those credit card balances back up.

Debt consolidation companies should be avoided at all costs. These companies operate by collecting money from you monthly and then promising to negotiate with your creditors. The negotiation with creditors could come right away or happen after the debts go to collections. If the debts do into collection, you have no protection against creditors that might want to sue you. In addition, your credit will take a beating. Avoid debt consolidation companies at all cost.

Debt is a Symptom

Having a lot of debt is simply a matter of math; it means that you’ve spent more than you made. If you don’t change your spending habits, debt will be like a boomerang and keep reentering your financial picture. If you’re facing a lot of debt, there is no question that it is time to put together a budget and take a hard look at finances.

• Instead of financing items you wish to buy, think about saving your money first and only after you have it saved, purchase the item.
• Cut back on expenses! Can you combine cell phone plans with family members and get discounts? Cut out cable TV and watch the Internet instead? Eat at home more vs. going out? Shop thrift stores?
• Get a second job to earn extra cash to help pay down bills.