The following is a guest post from by Jordan E. Goodman with Bill Westrom, Authors of Master Your Debt: Slash Your Monthly Payments and Become Debt-Free.
Now, you really want to pay off your balances once and for all, don’t you? Here’s all you need to know about that. In truth, paying off your balances is simple; there’s nothing complicated about it. But it’s not easy, because it does require sacrifice and scraping together the cash that will get it done. Here are five techniques you can easily put into practice to pay off your credit card debt.
1. Set your goal. Make paying off your credit cards your top financial priority. Use the Federal Trade Commission’s calculator (www.ftc.gov/creditcardcalculator) to see just how credit card interest drains your household budget. The average balance-carrying customer now owes $5,729 on his or her cards, according to the findings of a TransUnion survey. Even at the comparatively low (for credit cards) interest rate of 14 percent, that’s taking $67 a month in interest payments alone out of your budget.
2. Squeeze your budget. Turn a cold eye toward your expenses and find some extra money to send to your credit cards every month. Do whatever it takes: cancel cable, eliminate dinners out, stop buying shoes, skip a summer vacation. Seriously. Once you burn this debt for good, you’ll have even more extra cash for the niceties of life. But until you do, make this your priority.
3. Throw extra lump sums at the problem. Tax refund? Check. Christmas present from Mom? Check. You can really jump-start your debt-paydown plan if you take drastic action. Hold a yard sale, moonlight as a babysitter or lawn mower, or do something at a higher earnings rate, if you have that option. Send all of your earnings to your credit cards.
4. Pay off the highest-rate card first. That is, pay minimums on all of your cards, but send all of your extra payments to the card with the highest interest rate. Some credit card experts disagree with this advice, but they are wrong. They suggest that if you instead send extra money to the lowest-balance card, you’ll burn that balance faster and it will make you feel better about the whole enterprise.
You’ll see why this advice is wrong once you look at the numbers. Here’s an example from the excellent DebtSmart web site (www.debtsmart.com). Your Costly Card has an $8,000 balance at 19.8 percent interest and a minimum monthly payment of $160 a month. Your Bitsy Card has an interest rate of 5.9 percent, a balance of $6,000, and a $120 a month minimum. The two minimum payments equal $280, but you’ve figured you can pay an extra $120 beyond that every month.
If you pay the extra $120 to Bitsy Card, you’ll get it paid off in 27 months. At that point, you’ll still have a balance of $7,068 on Costly Card. By the time you pay that off, at $400 a month, it will take you another 21 months, and you’ll have paid a total of $5,120 in interest.
Now go the other way. Pay only the monthly minimum of $120 on Bitsy Card, and pay $280 a month to Costly Card, the high-priced card. That balance will be burned in 39 months. You’ll be left with a $2,124 balance on the cheaper card, and it will take you less than six months to pay that off. Your interest total will be $3,740. At the end of the day, you’ll have paid both cards off five months earlier, and you’ll have paid $1,380 less in interest.
5. Use your HELOC. If you’re struggling under the weight of a high-priced credit card debt and you have a home equity line of credit on your house, you can consider using that line to pay off your credit card. The danger, of course, is that you’ll run into trouble, lose your job, and not be able to make your payments. Then you could lose your house, instead of just your credit rating!
So, don’t take this step lightly. But HELOC rates are really low now; some are hovering just over 2 to 3 percent, and that interest is usually tax deductible. If you can easily afford the payments and have a secure source of income (and a backup source for a rainy day), you can take the credit card issuers off of your creditor list altogether by simply paying off your card with your home equity line. Then follow the same drastic action techniques to kill that debt as soon as possible.
With the new legislation going into full effect on February 22, there will be rate protections, billing and payment protections, easier payments, account management, and protection for young borrowers. In the meantime, work on implementing these practices and develop good credit card behavior.
The above is an adapted excerpt from the book Master Your Debt: Slash Your Monthly Payments and Become Debt-Free by Jordan E. Goodman with Bill Westrom.