Eliminated Credit Card Debt

Eliminated Credit Card Debt: The Formula

The following is the formula for eliminating your credit card debt. It will take some time, perhaps a few years, but at the end you will have no credit card debt.

• Stop using your credit cards
• Make a list of each credit card, the amount you owe and the interest rates on those.
• Find the card with the highest interest rate (Card A). Then start paying double the minimum payment. For example, if your minimum payment is $25, you’ll be making $50 each month until it’s paid off.
• Make the minimum payments on the other cards.
• When Card A is paid off, start working on the card with the next highest interest rate (Card B). Only instead of just paying the minimum payments, add onto your monthly payments what you were paying Card A. For example, your minimum payment on Card B is $20 and you add $50 onto it. Now you’re paying $70 a month: a combination of what you were paying on card A and B.
• Once card B is paid off, take the combination amount you were paying on Card A and B, and use that to pay off Card C.
• Continue until all your cards are paid off.
• Close your accounts once the cards are paid off, so you’re not tempted to use them again.
• Finally, do not transfer your amounts from credit card to credit card to get a lower interest rate. Opening up extra credit cards can affect your credit rating.

Change Your Spending Habits

You may find that the biggest obstacle to eliminated credit card debt is yourself. You will need to stop using your credit cards to get out of debt. Make a list of what you are using your credit cards for. If you’re using your credit cards on clothes and other luxuries, cut them up. Make yourself a budget and stick to it.

If you’re having problems changing your spending habits, or you are using your cards for necessities such as groceries because you can’t afford to get them any other way, consider getting professional help. It can be overwhelming to finally realize how much you owe and then change your shopping habits. Consider getting Consumer Credit Counseling from a non-profit service like Consumer Credit Counseling Services.

Creating a Budget

• Get a money managing program like Quicken or Microsoft Money so you can see exactly where your money is going. These programs allow you to create graphs so you can create percentages of how much of your income you spend on groceries, clothing and other expenditures.
• Calculate how much you spend on the easy bills that don’t change month-to-month, like your rent or mortgage and a car payment or other transportation costs.
• Make an estimate of how much you spend each month on things that tend to change a little, such as groceries, utilities, gas and so on. Together, your rent/mortgage, utilities, transportation and groceries (the things you need to survive) should total about 60 percent of your income.
• Decide how much you can afford to spend on luxuries, usually around 10 percent of your income.
• Create a savings account for emergencies, vacations, holiday purchases and larger expeditures, generally about 10-20 percent of your income.
• The final 10 percent should go toward your retirement. If you have children, you may want to put a portion of this toward your child’s college account.

Question Tapping the Equity in Your Home

Many people tout getting a home equity loan or a line of credit to help in the quest toward eliminated credit card debt. While home equity loans are tax deductible, and your interest rates will probably be lower, you may end up creating a bigger problem if your house’s value goes down (as it might do in some markets). And if you can’t pay off your home equity loans and your mortgage, you could end up losing your house. So make certain you're dedicated to paying off the loan or line of credit before making such a commitment.