Using credit cards is easy; usually too easy. In theory, credit cards are safe and simple if you pay off the balance each month. The problem is that close to 60% of households with credit cards do not pay off the balance. If you are looking for an effective debt solutions to pay off those credit cards, there are a couple that could work.
Before addressing how to clear your debt, you need to be ready to stop accumulating debt. It does little good to pay off your credit card debt today if you’re just going to start running up new debt tomorrow. Along the same lines, you’ll need to be ready and willing to set up a budget that allows you to live on less than you make. Too many of us find it too easy to just put something on a credit card when it doesn’t fit into the budget.
So, if you’re ready to get started, here are two theories of debt relief that can help. While they are similar in most respects, one takes a primarily mathematical approach to the problem and the other a more psychological approach.
The mathematical approach:
1. Make a list of all your credit cards. Include the current balance, the interest rate and the minimum monthly payment. For example:
a. Card 1: $5000 balance, 12% interest, $125 minimum payment
b. Card 2: $3000 balance, 10% interest, $75 minimum payment
c. Card 3: $7000 balance, 14% interest, $200 minimum payment
d. Card 4: $2000 balance, 9% interest, $50 minimum payment
2. Organize your list according to interest rate with the highest rate at the top. With our sample cards, your list would look like this:
a. Card 3
b. Card 1
c. Card 2
d. Card 4
3. Check your budget and see how much extra you can come up with to put toward paying down these debts.
4. Pay only the minimum payment on each card except the one at the top of the list, card 3 in our example. For card 3, pay the minimum plus whatever extra money you have.
5. Continue to do this each month until card 3 is paid off. Then, repeat this process for the next card on your list and so on until all cards are paid off.
The theory behind this approach is that higher interest cards are more costly, so there’s more to be saved as you clear your debt by getting rid of the higher-interest cards first.
The psychological approach:
Instead of ranking your cards by interest rate, rank them by current balance, smallest to largest. Our sample cards would be ranked in this order: card 4 ($2000), card 2 ($3000), card 1 ($5000), and card 3 ($7000). You still pay the minimum on every card except the one at the top of your list. That one gets the minimum plus any extra you can put toward debt relief.
Paying off debt is hard work that requires habits to be changed. Positive reinforcement is needed to keep you on track. This theory works by giving you quick results. You’ll pay off that card at the top of the list faster and build some momentum to attack the rest of the cards on your list.
Either approach works if you’re committed to the process; just decide which one is the best fit for your personality and mentality.
Debt