7 Simple Steps to Get out of Credit Card Debt
If you're struggling with debt, clearly you're not alone. Being debt-free takes resolve and a little know-how. We'll help you get on the right track, starting with these seven steps.
Step 1: Separate "Bad Debt" and "Okay Debt"
How can you tell the difference? "Okay debt" has an interest rate under 10 percent -- preferably with tax advantages to boot. In the best-case scenario, the thing you bought with borrowed funds will appreciate in value (think mortgage and even that student loan). "Bad debt" is everything else -- especially credit card debt.
Step 2: Don't Pay by Their Rules
The "minimum amount due" is cleverly calculated to keep you beholden to The Man for your entire adult life. A $4,500 balance on a card with an 11-percent APR will take 44 years to pay off, even if you don't put another dime on the card. Oh, and the interest you'll pay on that loan? A whopping $17,000! That's why you're going to pay by your rules. Keep reading.
Step 3: Get Intimate With Your Visa
Gather your bills and clear a space at the kitchen table to line them up. Rank your cards from the lowest to the highest interest rate. Identify the one major credit card with the lowest annual interest rate and room for a balance transfer. See which high-interest rate cards you can phase out of your life and move to the low-interest card.
Step 4: Play the Heavy With Your Existing Lenders
Grab a bill from any account charging you more than 19-percent interest and ask to have your rate lowered. Say you've received offers for much lower-rate cards. Your lender would rather keep you as a customer than pay $50 to $200 to find your replacement. Plus, studies show that more than half of the customers who tried to negotiate lower interest rates had some success.
Step 5: Lather, Rinse, Repeat
Pay the minimum amount due (on time, every time!) on all accounts except the one with the highest rate. Send every extra dollar, every quarter you find on the street, every dime you earn over time, and that crumpled $20 to the high-interest rate winner -- well beyond the minimum your lender hopes you'll pay from now until eternity. Lather, rinse, and repeat until you've washed each debt right out of your hair.
Step 6: Be Prudent
Be aggressive in paying down debt, but don't get so ambitious that you risk missing minimum payments on your mortgage, automobile, or any other secured credit account. (Secured means that if you miss enough payments, the bank can show up and take your stuff.) Give yourself props each day you keep your cards in your wallet.
Step 7: Resolve to Spend Less Than You Make
If you can't pay for it today, then you can't afford it. In a household built for two, that goes doubly. Spend less money than you make on a consistent, long-term basis and you can amass a nice chunk of change in just a few months. Look at you! Not only are you out of debt, you're saving for the future!
Nestpert Dayana Yochim of The Motley Fool, an investing and personal finance website, and author of The Motley Fool's Guide to Couples & Cash: How to Handle Money With Your Honey