In the U.S. the average credit card debt per household is $15,956. As of year-end 2008, there were 176.8 million credit cardholders each with 3.5 credit cards on average. The total U.S. consumer debt as of December 2011 was $2.5 trillion. Wow.
Over the last few years, Americans have been making an effort to spend less and save more but it’s not easy. Life is expensive. Just when you’ve gotten yourself on track – tucking away the credit cards, making payments on time, and setting aside a little in savings – something unexpected pops up and ruins everything. It’s going to take time and there will be setbacks, but it is possible to live a debt free life. There are some simple things you can do to start digging yourself out of debt now.
- Stop using your credit card. Cut them up. Or, do what I do and put your card in a bowl of water and freeze it. That way, it’s hard to get to but you can in an emergency. Try going cash only or just using your debit card.
- Start budgeting to find extra dollars to put towards debt.
- Look for “zero percent for one year” balance transfer offers. This will let all of your payments go towards the principle, rather than interest.
- Call your credit card company and see if you can negotiate a lower interest rate on your credit card balance. If you’re a loyal customer who pays on-time, they may be inclined to lower your rate if you ask – especially since they know you can always transfer your balance to a competitor.
- Bankrate.com has a calculator to help you find out what it will take to pay off your credit card.
Once you get a handle on managing your debt, you need to work on improving your credit score:
- More recent late payments have the biggest impact on lowering your score so pay any past due payments on accounts that are a month or two behind.
- Once you’ve caught up on past due accounts, contact the creditors and ask them to make a good faith adjustment to remove the late payment information from your credit report files. It might not work but some might agree to work with you so it’s worth a shot.
- Maxing out one credit card can reduce your credit score. It’s better to evenly spread your balances over your cards with the lowest interest rates and the highest credit limits so that you’re not using more than 50 percent of the limit on any card. If you need more wiggle room, you can ask the credit card company to increase your credit limit.
- Some credit card companies don’t report the credit limit to the credit bureaus, thus reducing your score because without that information, the score counts the account as being maxed out. You can ask the credit card company to provide that information to the credit bureaus and if they refuse, transfer the balance to another card that reports credit limits.
- Try to keep major bank credit cards that you have had for a long time and have good payment histories. Cards that have the longest history and the highest credit limits will boost your credit score. Cancel revolving department store cards because they have the lowest credit limits – and tend to have the highest interest rates. When you use them, the debt to limit ratio will be high and hurt your score.
For more help tackling your debt, take a look at this great article from the Motley Fool:
By Motley Fool Staff
Imagine being free of debt – no more sleepless nights over mounting credit card balances, no more ball-and-chain of debt feeding your anxieties, and no chance of threats from dreaded collection agencies. You can do it! Here’s the scoop — in one minute flat.
0:60 Resolve to spend less than you make
Make it a habit as fundamental as stopping for red lights. Realize once and for all that if you can’t pay for it today — you can’t afford it.
0:55 Distinguish between Bad Debt and OK Debt
OK Debt has an interest rate well under 10% — preferably with some tax advantages to boot. In the best case, what you bought with borrowed funds will appreciate in value. Home mortgages and student loans are examples of OK Debt. Automobile loans are on the border: They often satisfy the low-rate piece, but automobiles almost never appreciate in value.Bad Debt is everything else — from your titanium credit card to the 35% loan from Larry’s Kwik Kash.
0:50 Pick a winner
Out of all your cards, pick the one or two major credit cards that feature the lowestannual interest rate. Resolve to use those cards for emergencies only. As for all the other plastic pals in your wallet, remove temptation by taking them out of your wallet. Throw them behind a major appliance, freeze them in a bowl of water, or decoupage them to a shoebox. Do whatever it takes not to use them.
0:41 Gather the latest bills from all Bad Debt accounts
Line these up on the kitchen table. Find the minimum monthly payment for each account and then add these up to get an overall monthly minimum. Pledge to pay this overall minimum PLUS a hefty additional chunk every month — enough to make a solid dent in the outstanding balance of at least one account.
If you can’t pull this off, you’ll have to make a drastic move to increase your income or lower your expenses. It’s harsh, we know, but it’s also an inescapable fact.
0:34 Pick the highest interest rate account and: Attack!
Next, order the latest bills according to annual interest rate charged. Apply the “hefty additional chunk” (beyond the minimum) to the highest rate account(s). Repeat this process monthly until the last Bad Debt account is paid in full.
0:26 Ask for a lower interest rate
Grab a bill from any account charging you more than 14% interest. Dial the toll-free number on the bill and ask to have your rate reduced — say, to 11%. Tell them that you’d really like to stay with them out of customer loyalty (embellish according to your acting skills), but that you have received offers for much-lower-rate cards. Expect to be made very uncomfortable, but stand firm and remember that, to them, you are both a customer and a profit center. You also stand to save a bundle. The more calls you make, the more persuasive you’ll become.
0:18 Be prudent
Be aggressive in paying down Bad Debt, but don’t get so ambitious that you risk missing minimum payments on your mortgage, automobile, or any other secured credit account. (Secured means that if you miss enough payments, the bank can show up and take away your stuff.)
0:12 Commiserate with others
On our Consumer Credit / Credit Cards discussion board, you’ll find plenty of emotional support and great ideas. Help others celebrate their debt-free “happy dance.”
0:05 Dance, Fool!
You’re done when the Bad Debt is 100% exorcised and you can make remaining OK Debt payments with ease, leaving plenty of budget room for savings.