Get Out of Credit Card Debt

Saturday, March 01, 2008
By Abbey Khan

Don’t let your credit cards get the best of you. Here are four ways to get out of debt as told by The Motley Fool guide.

Look at your bills and decide which ones are most important. Monthly living expenses like rent and utilities are mostly non-negotiable. Luxuries like premium cell-phone packages and digital cable are candidates for cutting.

With credit cards, look at the interest rates to see which ones are important. You could easily be paying twice as much to keep a balance on one card as you do for another. And with rates changing all the time, it’s something you have to check on with every monthly bill. Even cards issued by the same bank can have big disparities in finance charges.

There are two good ways to cut your rate. The first is to call your card issuer and ask for a lower interest rate. The other way to get a better rate is through balance transfers and other introductory offers. For example, Discover (NYSE: DFS) and Bank of America (NYSE: BAC) are just two banks that offer 0% interest rates on balance transfers.

If you play your cards right with those offers, you can move credit card debt from one low-rate card to another for months or even years. But be aware — many banks charge one-time balance transfer fees of up to 3% of the amount transferred.

Now it’s time to start paying off that debt. After you make all your minimum payments, take whatever’s left and apply it to your highest-priority debt. In most cases, that’ll be the credit card with the highest interest rate.

This is called snowballing, because as you pay down your debt slowly, month after month, your progress will get faster and faster. Every extra dollar you pay means less in finance charges, letting you put those additional savings toward debt reduction. When that first card is paid off, it’s one less minimum payment you have to make, so you’ll be able to pay off your second card faster.

Once you get the hang of it, snowballing will start to feel natural. The only danger is making sure you don’t get yourself back in trouble. Inevitably, some unexpected expense may threaten your plans. But don’t panic. A financial emergency may set you back for a little while, but nothing can stop you from eventually getting yourself out of debt.

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