Paying off Credit Card Debt

Is your credit card debt out of control? As much as I'd love to tell you otherwise, there is no overnight solution to this. There are, however, some reliable methods that will work to lower your debt, IF, you commit to sticking with a plan. The plan you choose is up to you. All will work so look over the suggestions (below), choose the one you feel will be easiest for you to adhere to, and make a promise to yourself to follow it to the letter. If you can do that you will reduce and ultimately pay off your credit card debt.

1) The Snowball Method

The "debt snowball" method can work well for anyone, and it works particularly well for those who have difficulty controlling impulse buying so need extra motivation to curb their spending. The way it works is you pay off your smallest debt first, then the second smallest, then the third, etc. Do this regardless of the interest rate you are paying, and keep at it until you are debt free. (The only time it's imperative to pay off a larger debt prior to a smaller debt is if you owe the IRS or are facing foreclosure.)

The reasoning behind this method is that to clear a small debt will take less time than to clear a large debt. Paying a debt in full can provide the motivation to pay off a second debt, then subsequent debts, and encourage you to keep going until all of your debts have been cleared. The downside of this method is that your smallest debt may not necessarily be the one that incurs the lowest interest rate charges. If this is the case you will be paying more than you would be if you paid off your credit card with the highest interest rate charges first.

2) Pay off Your Credit Card With the Highest Interest Rate First

Some people, including those who have been using a credit card with a high interest rate and who have used over 30% of their credit line, can do better paying off their largest debt first. Paying off your credit card debt this way will result in a more favorable credit score as the amount you owe compared to the amount of available credit will be lower. Many people also find it rewarding, both on a monetary and psychological level, to pay off the credit card which incurs the highest interest rate charges first. This is the card that's eating the biggest hole in your pocket, so getting it out of the way can be a relief.

The downside of this method is that if will take longer to clear the debt from your card with the highest interest rate if the balance owing is high.  This method may also not be the best choice for people who feel they need the extra motivation provided from totally clearing the debt from at least one card to be able to stick with a budget and pay off additional credit card debt. 

3) Balance Transfer Credit Card

A balance transfer involves transferring your debt to another credit card with a lower interest rate which can be as low as 0% interest for a set period of time. While this may sound great in theory, and it definitely can be, before signing on the dotted line take the time to work out how much the transfer fee will cost you.  If it is high there may be little to no point in going ahead.

Another thing to be aware of is that following the transfer you will have in your possession a credit card with zero balance.  For some the temptation can prove to be too much and they will find themselves using the card. Remember, the idea is to lower your debt, not increase it. Your debt still exists and still needs to be paid off. If you are fail to do this your situation will not improve, and will in fact worsen more and more as time passes.

A further negative to this method is that opening a new account can have an adverse effect on your credit score, albeit a temporary one.

4) Leave Your Debt in Place

Don't confuse moving your credit card debt to another card as paying it off. While you may feel relief, the reality is you still have a debt that has to be dealt with.  Shifting that debt to another card will at best be a bandaid solution if you keep spending and racking up more debt.

Another thing to be aware of is that if you are thinking of applying for a loan anytime soon, acquiring a new line of credit will, at least for the short term, negatively impact upon your credit card score.

5) Save for a Rainy Day

It's estimated that up to one third of Americans have no savings other than the money in their retirement fund. If an unexpected emergency expense crops up the only alternative for these people is to cut back in other areas, which may not be possible, or to seek a loan from family members or friends.

For those people who have some savings put aside, using them is not ideal as it can make for a precarious situation, especially in the current economic situation when more and more people are being stood down from their jobs. Always try to have at least one month's worth of expense money put aside for use should the need arise, and do not touch that money unless there is a genuine and pressing need.

6) Utilize Your Savings

If your debt is very large and you have some savings available, using some to decrease your debt can be a good idea, but using all of your savings is not.

Emergencies have a tendancy to occur when we are least prepared, so it's important to have some money put aside for them. Having to borrow more money on top of what you owe will put you into deeper debt, so it's wise to have at least $1,000 put aside at all times. Once all your debt has been cleared, try to add to what you have put aside until you have enough in savings to fund 3 to 6 months worth of living expenses should the need ever arise.