Tips to Manage Your Credit Card Debt Print
Written by Chairman   

The average American household with at least one credit card has $8000-$10000 in credit card debt.  If you are not paying off your balance every month, you are throwing away money.  Credit cards are convenient and make buying easy but the flipside is that they also make racking up debt easy.  If you find your debt growing faster than you like, take these steps to gain back control.

Many people try stop using their credit cards cold turkey or cut them up or cancel them to prevent further debt.  If you are conscious about your credit score however, it isn't recommended to completely stop using or cut up your credit cards.  The credit card companies of unused credit cards do not forward any data to be sent to the credit reporting agencies so those unused cards do not contribute to your healthy credit status.  If you don't use or hardly use your credit cards, your credit card company may lower your available credit limit, possibly lowering your credit score if you carry large balances on your cards as your debt to available credit ratio will change.  Canceling credit cards also may lower your credit score for the same reasons, as your available credit on that card will be removed from your total available credit, again lowering your debt to available credit ratio.

If you carry a large amount of credit card debt, it's time to start addressing the situation before it gets out of hand.  From now on, your credit cards should only be used to make a purchase if you are going to be able to pay off that purchase within that month. 

A very successful and efficient method of dealing with your debt is to adopt the "Snowball" method of debt payment.  As you roll a snowball around in the snow it picks up more and more snow and increases in size.  (Those of you in warmer climates will just have to take our word for it.) What this method entails is making the minimum payment on all of your credit cards/debts while making an additional payment (the snowball) each month on your highest interest debt.

For example, lets say you have three credit cards, a car loan and a mortgage:

Credit card #1 has a balance of $3000, a minimum payment of $50 dollars a month and an interest rate of 19%

Credit card #2 has a balance of $5000, a minimum payment of $70 dollars a month and an interest rate of 15%

Credit card #3 has a balance of $2000, a minimum payment of $30 dollars a month and an interest rate of 23%

Your car loan has a balance of $8000, a payment of $400 dollars a month and an interest rate of 4.9%

Your mortgage has a balance of $200,000, a payment of $1800 dollars a month and an interest rate of 5.5%

Your minimum monthly payments equal $150.  You decide you can afford another $200 a month towards your credit card bills.  This is your snowball's "seed".  How it works is that take your seed money and apply the credit card with the highest interest, in this case card number 3 (23%).  So you pay $230 dollars towards that card and continue to pay the minimum monthly payment on each other card.  I would suggest putting each card on autopay for the minimum payment that way you don't have to worry about any penalties or credit hits you would get if you are late.  Pay this amount on card number 3 until it is paid off.

Once Credit card #3 is paid off, you take the entire amount you were paying towards that card ($230) and add it to the minimum payment of your next highest interest card, in this case card number 1 (19%).  You were paying $50 a month on card 1 so add that to the $230 and your payment on card number 1 becomes $280.  As with card number 3 pay this amount until the card is paid off.

Once card number 1 is paid off, move your "snowball" which is now $280 a month and apply that to your last card, card number 2.  Card number 2's minimum payment of $70 plus the $280 you've been applying brings your total payment on this card to $350. 

Now, you are left with the car and the mortgage.  Now even though your mortgage has the higher rate, you should deal with the car loan first and save the mortgage for last.  Why?  Well, you will usually leave the mortgae for last because the mortgage interest rate will typically be lower than your other debts (not so in this case by design to make the point but they are close enough to be negligible) and any interest you pay on the first million dollars of a mortgage loan can be claimed as a deduction on your taxes.  Speak with your tax professional for more details.

To the car payment of $400 in our example, you would add the $350 you were contributing to your credit cards for a total monthly payment on the car of $750. You have now more than doubled your car payment and will be paying it off in approximately half the time as well as saveing yourself money in interest.

Once the car is paid off you take the $750 car payment and apply it to your mortgage payment of $1800/mo for a total of $2550.  You are now shaving years off your mortgage payments as well as earning equity in your house at a much faster rate.

Remember, you are not paying more than you did the previous month (though you could if you can afford to) you are simply taking the money you were paying on your other debts and applying it to the debt with the highest interest.  Using this method will help you pay off you debts exponentially faster than if you simply made the minimum payments or an extra payment here or there and it will save you lots of money in interest you won't be paying.  Of course, the larger your initial "seed" money is, the faster you will pay off your debts.  Whatever your financial situation is, adopt a system and manage your debt properly, like you would in all of your other wealthbuilding endeavors.  Get rid of your bad debt and put your money to work for you instead of using it to pay somebody else's interest charges.