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Credit Cards

Paying Off Credit Card Debt in 12 Simple Steps

There’s no greater financial freedom than eliminating credit card debt when you’ve been struggling to get ahead financially for years. By taking specific steps to get control of your credit accounts, you’ll not only save thousands of dollars in the long run, but will actually gain greater buying power and qualify for the best credit cards as your credit status improves.

Follow these 12 steps to wipe out credit card debt.

Assess the Situation — Many individuals want to pay off their credit card debt, but don’t really have a clear picture of how much they owe, especially when outstanding balances reflect different interest rates, applied for special purchases or promotional purposes. It’s easy to lose track of a mounting balance when charging things like auto repairs, school tuition or medical expenses. Part of the reason individuals drag their heals when paying off credit cards involves the effort it takes to analyze credit accounts and assess the total financial picture.

Limit Payoffs to One Debt at a Time — In order to pay off credit card debt it is critical to focus on only one credit account at a time. While it is necessary to make at least the minimum payment for each open credit account, by applying any extra cash to just one balance, you can make significant progress. Although the amount subtracted from the current family budget may stay the same at this point, a reduction in the balance of one main account does two things, essentially. First, it gives the individual confidence that debt can be successfully eliminated. Second, by paying off even one credit card account, the debt ratio-to-income will be reduced and credit scores will increase. This is important when negotiating for a better interest rate.

Check Your Credit Report — It’s critical to know where you stand financially before you make a plan to pay off your credit card accounts. Your credit report will reflect open and closed credit accounts, your payment history, credit activity, and any recent credit related inquiries. This information is necessary (along with your credit score) to negotiate the best credit terms.

Secure Better Rates — Depending on your credit score and your payment history, you may be able to negotiate with credit card companies for better interest rates. Even a small reduction in interest can ultimately save you hundreds of dollars as you pay down credit card debt.

Transfer Balances — High interest rates cost credit consumers substantially more money and accounts take much longer to pay down. In the beginning, most of a credit card payment is applied to the interest charged monthly, allowing an individual to carry a balance on the account. Initially, the ratio of interest to principle within a payment is very high. As the balance is reduced over time, a larger portion of the payment is applied to principle.

Track Costs — While paying down credit card debt you’ll need to track your costs, both “fixed” and “flexible” in order to determine how much money to apply to payments each month. Rent, home mortgage, auto insurance, and any loan payments must be included in the fixed costs of everyday living. Student loan payments, auto loans and mandatory dues or memberships are considered fixed costs as well. Flexible costs include food, gasoline, utilities, recreation and entertainment. Home or auto repairs, and any medical costs fall under “necessary flexible spending”. Each of these expenditures must be carefully monitored and considered when attempting to payoff credit card debt.

Create a Budget — Since the ultimate goal is to pay off credit card debt, the extra money you’ll need to do so must come from somewhere. Unless you or your spouse is planning to get a substantial raise in the near future, you’ll need to put together an individual or family budget. This must address all fixed costs including housing, utilities, insurances, and taxes, as well as flexible amounts for food, gasoline, clothing, and other incidentals. A budget must also include money for unexpected expenses like car repairs, and medical visits.

Choose a Successful Payoff Strategy — Several strategies have been successful for paying off credit card accounts. The snowball method is applied to the credit card with the smallest balance, first. This requires a strong commitment to making on time payments, along with extra money to put toward principle. Since minimum payments do include small amounts of the principle balance, it is technically possible to pay off credit card debt this way. This is not an efficient strategy, however. Remember, the bank makes its money off of the interest paid on the principle balance. The longer they can extend the payments, the more money they make. Just because an individual is allowed to make minimum payments on a credit card account doesn’t mean they should. The confidence you’ll get paying off your first credit account will help motivate you to keep going, tackling the next lowest credit card balance with the money you save from eliminating the first.

The avalanche strategy involves choosing the credit card account with the highest balance, and paying it off first. This method allows individuals to save the most amount of money on interest charges and works best for those who can already make the monthly payment comfortably. The avalanche method also helps to motivate many individuals to continue to pay down credit card accounts.

Divide and Attack Credit Card Balances — Just like many of the more unpleasant things in life, the end goal may seem elusive. By breaking up your credit card debt into smaller, more manageable chunks and paying off just a portion of the balance, you can make successful, incremental changes that eventually make a difference. Slowly, you will chip away at the outstanding credit card debt and move forward, able to attack the next block with confidence.

Hide Any Plastic — While your credit accounts have likely gotten you through some very difficult times and situations in the past, things have changed. Now that you’re working towards paying off credit cards and are committed to making successful, life impacting changes, you can no longer afford to use your plastic in a pinch. While it may be tempting to charge on your credit card just one more time, you must stay the course and stick to your plan, in order to reach your end goal of a zero balance.

*Remember, bringing your credit card on vacation, to a casino, or to the auto shop will most likely land you back in the same spot you were in before taking steps to pay off your account.

Gather Motivation — Besides lightening the financial load, it’s important to keep mindful of the goal you wish to achieve by paying off your credit card debt. Maybe you want to purchase a home, but your debt ratio-to-income precludes you from qualifying for a mortgage, or credit card balances make it impossible to purchase a new car. Whatever your motivation to reduce credit card debt, it’s important to keep moving forward with an eye toward the future.

Mark Your Progress — While developing a strategy to pay down and payoff credit card debt is critical to the success of your financial situation, it is also important to keep track of the progress you’re making. After all, you may need to change tactics, as you get closer to your end goal and will want to know exactly where you stand.

While paying off credit card accounts can take time and be difficult, the reward you’ll get by reducing your debt ratio-to-income and improving your credit scores, will give you the financial freedom you’ve always wanted. By following just 12 simple steps, you can systematically and effectively knock out credit card debt for good.

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Jeff Dunphy

Jeff Dunphy has years of experience in the field of borrowing. He is the founder of a website that teaches consumers about credit cards, credit scores, loans, and credit repair.

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