When the siren’s call of ‘Spend, Spend, Spend’ is met with the battle cry of ‘Charge It! Charge It! Charge I!’ the consumer finds themselves sinking deeply into debt. No matter how hard they struggle against it, eventually the credit runs out and the spending must end.
For those consumers who are not able to decide early to end it for themselves, the credit card companies will eventually do it for them. Other consumers recognize the inevitable end first, but still find themselves wondering how to get out of that mess.
There exists a minority of people who are so far in debt that they will not be able to save themselves without help through bankruptcy or getting a bail-out from somebody else. Most people are capable of paying off their debt on their own.
In their efforts to claw back from the brink of despair, some people fall prey to scams that promise to eliminate debt quickly, easily, and without any pain. Others make minimum payments for years and wonder why they are not making any progress. A fortunate few learn the right way out, and use sacrifice and dedication to successfully eliminate credit card debt.
FIRST STEP TO ELIMINATING CREDIT CARD DEBT
The first step is to realize that the same old routine is not going to cut it. There is only one way that people get into credit card debt. That is by spending more than they make. Sometimes, it is involuntary – such as with medical bills or a series of family disasters. Often, it is the little things adding up.
Regardless, something needs to change. Once that change is in place, there is less money going out than what is coming in. Even better, the next steps in eliminating credit card debt can begin.
Effective change does not always have to mean big changes – although those help too. Quit smoking. Quit drinking. Make your own coffee. Stop dining out. Nearly eliminate buying gifts – and make the ones that are bought less expensive. Each one of these changes can add up to big bucks over time. If these smaller, more frequent changes are not enough, more drastic changes can lead to success. Major changes include downsizing where you live, selling vehicles or trading them in for smaller and less expensive ones, and temporarily going to a macaroni and cheese, ramen, beans and rice diet.
At the end of this step net income must be less than expenses. Once it is, move on to step two.
STEP TWO: STOP USING THE CREDIT CARDS
Begin this step by stopping the use of all credit cards. It should be 100% stopped. Automatic bills can come out of a bank account or be paid using a bill pay service. It is at this point that the credit cards can be frozen in a block of ice and left in the freezer.
No, I’m not joking about this. Not having the cards accessible makes it much less likely that they will be used, which is the entire point of this step. If there is something you absolutely need the card for, you can thaw it out. Otherwise, the delay will help you avoid temptation.
Cutting the cards up would prevent temptation even more, but you want the accounts to stay open because it will help your credit – or at least it will once you have eliminated the debt.
STEP THREE: CONSOLIDATE AND LOWER RATES
As you look over your credit card debt, pay special attention to the available balance and current interest rates. Start calling up the issuers and ask them reduce the rate. Ask to talk to a supervisor if you must, but explain what the best rate you have is and explain that you will be consolidating down to the cards that are the best.
When you are done and have each issuer’s best rates, do what you said. Transfer all balances so that they are on the fewest cards at the lowest rates you can get. This will start saving money right away in reduced interest. There is a warning though that the balance transfers may come with a charge (3% in many cases). Not all cards charge it, but if they do, do not forget to include that fee when deciding which cards are your best deals.
STEP FOUR: DEBT SNOWBALL
At this point everything that can be done to prepare is over. It is simply a matter of payments outweighing the interest that is accruing. To ensure that the payments win as quickly as possible, the debt snowball focuses on one credit card at a time.
The snowball works by paying the minimum on all but one credit card. That one credit card gets all available cash. That extra cash all goes towards the principal amount to reduce it as quickly as possible. When the first card is paid off, the process is repeated with the second. Continue this until all cards are paid and there will be no credit card debt left.
For example, lets look at a case of having $750 a month to pay off debt. Five cards, ranked in order for biggest to smallest balances, have minimum payments of $150, $125, $100, $75 and $50. Initially, payments will be $150, $125, $100, $75 and the balance of $300 applied to the fifth card.
When the fifth card is paid off, using the same $750 a month, the payments would then become $150, $125, $100 with the balance of $375 applied to the fourth card each month. After the fourth card is paid off, it becomes $150, $125, $475. Then $150 and $600. Finally $750 on the last card until it too is paid off.
You can see how the snowball goes faster and faster as each card gets paid off. By the time all the cards are paid off, the lifestyle changes that were made at the beginning of the process will likely be permanent fixtures. This is a good thing as it leaves the question of what to do with the extra money when there no longer have a debt payment.
That however is a question for an entirely different article. Good luck, stick with it and success will be yours.