HOW TO GET OUT OF CREDIT CARD DEBT

 These days, millions of Americans carry a lot of credit card debt.  The average American household has over $5700 in credit card debt.  Many people have several cards when all you really need is one or 2 cards.

 

The thing is, credit card companies make money when you carry a balance from month to month.  Many cards have a grace period.  As long as you pay what you owe before the due date, then there is no interest owed.  However, if you fail to pay the entire amount, interest is charged in the next month based on the balance that you carry. 

 

Every day that you have this debt, the amount of interest goes up.  Discover.com posted an article on how to calculate your daily interest rate.  They say that,” if you divide your APR by 365, the number of days in a year. At the end of each day, the card issuer will multiply your current balance by the daily rate to come up with the daily interest charge. That charge is then added to your balance the next day, a process called compounding.”

 

For example:  If you have an APR of 25%, then your daily interest rate would be 0.068493.  If you have $1000.00 in a balance, that comes out to $ 1,020.76 at the end of the month.  By the end of a year, it comes out to $ 1,284.02 that you owe.

 

How do you get out of debt?  Well, there are many ways to reduce your debt.  You can consolidate all of your credit cards into a single loan – normally a bank would charge far less than credit card for interest.  However, if you still have the credit cards, it’s easy to get back into debt again and then also have the loan to pay off.

 

The only tried and true method for reducing debt is to first reduce your dependency on credit cards all together.  You need to fist learn to manage your monthly finances.  You need to sit down and figure out what items that you spend money on each month.  If you use a credit card for everything like most Americans, then use your monthly statement to take a look at exactly where your money is going.  If you have an electronic statement, that’s even better because then you can sort and filter based on categories or things bought and paid for.

 

Next, create a budget that considers your various expenses.  If you can get onto a budget plan for items such as utilities, then you should also consider that approach.

 

Also, it’s time to take a look at all of your credit sources.  What credit cards do you have?  What other revolving credit sources such as Amazon credit or a sears card are you carrying?  List all of them out and what interest they have.  Look at which one has a balance and which ones don’t.  Also, look at your car loans and mortgage?  Now would be a great time to run your credit check and make sure that your credit report is exactly where you expect it to be.

 

Finally, it’s time to act.  When I decided to get out of debt with my cards, I started with one of my accounts.  I looked at the statement for the monthly minimum.  I then chose an amount that I could afford to pay above that starting monthly minimum.  I used my bank’s bill pay feature to setup a reoccurring payment for that amount each month.  I did not change or reduce the amount month to month.  So, if the minimum is $150 and I could pay $300, I would pay the $300 each month.  The monthly minimum would get lower, and so would my balance, but I always paid the same amount.

 

In the meantime, for my other credit cards, I setup an automatic pay for the current minimum.  This minimum would get lower as the balance reduced, but the secret is to stay at the same level as when I started. 

 

Also, the other side was to make sure I don’t go any further into debt.  I lived within my budget.

 

Once I had that first credit card paid off, I would take the $300 that I was paying for that card and use it to pay off another card on top of the minimums for that card.  So, on card 2, if the minimum is $100, then I would pay $400 at this point.  After this second card was paid off, I would roll this $400 into the next card and so on.

 

After a card was paid off, I would consider closing the revolving account or credit card.  Yes, your credit score may take a ding from closing the account.  But it will tick back up again and may even go higher.

 

These days, I have 2 credit accounts with 0 balance that I carry month to month.  Both cards are paid each month and on time.  Once in a while a large item comes up and it takes a few months to pay it back.  But I never go more than 3 months on either account.  Even at Christmas.

 

Finally, all that money that I had to pay each month just to get out of debt, well, that rolled back into my budget.  Some goes to savings.  Some goes to other categories such as entertainment etc.

 

Credit cards are a necessary tool in everyday life.  The credit card companies want you to carry a balance month to month.  But the best way to make sure your money stays yours is to take control over how you use them.

 

One final warning.  When you look at your monthly statement, look for stealth interest charges.  Some cards charge a monthly fee.  These fees add up.  There are some cards that don’t charge any fee.  Use those cards as your primary, and research other credit cards that don’t have any fees.  Cancel cards that do and if you need to open an account with a company that doesn’t charge these fees.

 

Another tip is to look for cards with low interest rates.  You can sign up for a credit card and transfer your balance to those cards and also save some money.  Those low interest rates usually only last up to 18 months.  But in the meantime while you are paying down your balance, you can save on interest.

 

The main idea is to take a proactive approach to credit.