How to Pay Down Debt

Once you learn how to pay down debt you can start to enjoy the satisfaction that comes with being in control of your financial situation. Do your research and find the pay down solution that works for you.

Learn the best ways to pay off debt.

According to the Nilson Report, a credit card industry newsletter, the average amount of credit card debt at the end of 2008 was over $10,000 per household. Many households only make minimum payments on their credit card balances each month. Some have no idea when they are going to be able to pay off a credit card based on their current payment habits.

The first step in paying down your credit card debt is to fully understand your debt problem. You need to know the details of your credit balance and the APRs that you are paying.

Paying down credit card debt is not difficult; however, it does require a plan and often involves some sacrifice.

Cardholders are often unaware of the total amount of their debt, particularly if they only focus on one monthly credit card statement at a time. You need to get a full understanding of your debt before you can implement a plan to pay down your debt.

Make a list of all your credit cards, listing the credit card with the lowest balance first. For each credit card, note the:

• Amount owed
• APR for the current balance. You may have several different APRs, each assigned to a part of your balance. When are those APRs scheduled to change?
• APR for new purchases
• The amount of available credit

Review your budget and determine how much you plan to spend each month to pay down your credit card debt. The more you spend, the faster you will pay off your outstanding debt. One handy guideline is to try to increase the amount you are currently paying on your credit card bill by 50 percent. For example, if your current total credit card debt is $10,000, you are probably currently paying about $500. So, to increase your payments by 50 percent you would need to increase the total of your payments to $750.

Finding the funds for this extra payment often requires savings in several other areas of your spending such as:

• Giving up restaurant lunches and dinners. Eat at home. Take your lunch to work or school.
• Avoiding designer coffees and snacks
• Cutting back on clothing expenses including new clothes, shoes and dry cleaning
• Changing your entertainment expenses. Invite people to your home to party instead of meeting them at a restaurant or club.

Once you have determined the amount of funds you have for credit card payments each month, you can decide how you are going to use those funds to pay down your balances.

There are several methods to reduce your credit card debt. For example:

1. Pay more on the balance owed. If you are only paying the minimum payment each month it could take years to pay off your debt. The finance charges during that time could significantly increase your debt.
2. Request a lower APR from the card issuer. This will reduce your future finance charges and keep your debt from growing so quickly.
3. Consolidate your debt by transferring balances onto cards with the lowest APR.

The list you made in Step 1 can help you decide which method to use to reduce your debt. For example, if you have:

• A good payment history you may have the opportunity to negotiate lower APRs on some or all of your credit cards. Although this won't lower your current debt, it will certainly minimize the debt that will be added due to finance charges.
• A lot of available credit on a credit card with a low APR, you might want to consider consolidating some or all of your debt onto the credit card with the lowest APR. Make sure the balance transfer isn't considered a cash advance by your credit card company because interest rates are often higher for this type of transaction.
• Some cards with significantly higher APRs than your other credit cards, you can minimize the growing amount you owe for finance charges by paying off your highest APR credit card first. Once that card is paid off, you can move on to start paying off the next highest APR.
• One card with a low balance with the balance of your credit spread across your other credit cards, you might want to pay off the low balance credit card first. Even if this is not the card with the highest APR, the satisfaction of having a zero balance might be a good motivator to keep you going on the road to debt payoff.

If you are have not been able to make even the minimum payment on your debt for several months, your credit card issuer may be willing to negotiate a debt settlement with you. The card issuer may be willing to settle for up to 50 percent of the balance if you are willing to set up an installment plan to pay off the remaining balance.

Once you have learned how to pay down debt, you should concentrate on how to stay out of debt. Watch your expenses and resist the urge to use a credit card for purchases you can't afford to make.

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