Possible ways to get rid of credit card debt
I hear various offers and ads on how to get out of debt. There’s so many methods out there I figured I would give my analytical look at each one. Some of these I’m actually considering doing and others are not even worth my time looking further into.
Ways to get rid of credit card debt:
- Make the minimum payment each month - I was using this calculator over at Bankrate to figure out how long it would take to pay only the minimums to rid myself of credit card debt. Needless to say it would take over a decade and I would pay several times over what I actually owe present day.
- Pay off accounts from highest to lowest interest rate - If I look at the simple math, it would make sense in theory to pay less interest over a long timeline.
- Pay off accounts from lowest to highest balance - This is the “Dave Ramsey” system in a way, I read about this before so I cannot give him full credit, by paying off a small balance first and applying the payment to the next debt helps decrease principle faster which should in turn reduce and eliminate debt faster.
- Using home equity/consolidation loan - Taking the credit card debt and converting it from high interest unsecured to lower interest secured debt. Partial benefit of this is being able to use the interest paid as a tax deduction come tax time.
- Debt payment plan - Some companies out there will basically take over the credit card payments for you by paying them a lump sum every month. These services do cost you though, roughly 20% of the original debt you’re paying goes to them. Why pay someone else to make payments for you?
- Debt settlement - I hear so many offers where you can save, “up to 50% on the dollar” off your debt. The problem with these debt settlement services is you are paying them to build up a payoff in order to settle your debt. Most of the time this is done instead of just paying on the debt, which will destroy your credit. You can also handle debt settlement yourself without a need for a third party.
- Bankruptcy - Too much debt? Hit the reset button and get a clean start! Yeah right. Credit reports stay messed up for 7-10 years and it is a long struggle to re-establish credit. I think some people out there think this is some sort of safety net for their poor mistakes they made with credit.
I use a combination of some of these methods to get my debt under my control and not let it control me. As various credit card offers throwing the 0% interest come across my hands, I do consider the math in terms of if I were to transfer a balance to it I could pay pure principle on that debt and eliminate it faster. The other is to get the high interest debt into a secured loan or transfer it to one of those life of the balance cards. By converting the debt into other forms does not pay it off, but it helps motivate me to get it paid off faster and pay less interest. If I missed something by all means let me know.
Just to leave you a little more info about debt settlement while it does hurt your credit score, this is only temporary. The big factor you need to look at about debt settlement is the fact that you save thousands of dollars and you are out of debt in a fraction than you would be paying the minimum.
A good debt repayment plan, without hurting your current budget:
Gather all your bills, order them from least interest to highest interest, then low balance to high balance. Pay the highest interest first, dedicate as much as reasonable without hurting your income to pay it off early, pay the minimum of the other cards. Add up everything you are paying on all the cards, this is your debt repayment amount.
When the first card is paid, put the entire payment into paying the next highest interest card. And so on, until on the last card your payments to ALL your cards is ending up on 1 card. The more cards you pay, the faster the next card gets paid off.
Use a calculator online (there are many) to figure out how long it will take you to pay them all off. Mark it on your calendar as your goal date. Having a goal date is important I think. Finally, cut up all the cards and pay only in cash. Not forever, just until all the debts are paid. This helps you get rid of bad spending behaviors, and also prevents you from extending your debt further.
Most importantly, dedicate a fixed amount to pay off that debt and don’t overextend. Nothing will work if you end up back on credit cards because your debt repayment amount is too high. It is also important to start simultaneously building an emergency savings fund if you do not have one already. While in debt, a thousand or so is fine…just something to cover unexpected problems, like a car breaking down.
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I recently have had some credit problems. I liked my credit cards waaay too much. I think the best thing you can do to recover is to allow yourself enough time to straighten everything all out. Nothing happens overnight, especially fixing a credit score.