Eliminating Credit Card Debt

The National Retail Federation estimates about one-third of Americans primarily use credit cards for Christmas shopping.

That means roughly one-third of Americans soon will receive their credit card statements and begin the perhaps not-too-joyous chore of paying for their purchases. If you happen to be one of those saddled with credit card debt – amassed during Christmas or any other time of the year – consider these tips for eliminating your outstanding balance:

• Pick a plan. Eliminating credit card debt takes discipline and dedication, both of which are easier to maintain when you’ve put a sound plan in place. Maybe the most obvious plan is to pay off the credit card with the highest interest rate first. It’s the one, after all, that’s costing you the most in monthly finance charges. Another popular option, however, has been dubbed by some the “snowball” method. Following this plan, you pay off the card with the lowest balance first. The logic with this method is that paying off any debt feels good and serves as positive reinforcement that the plan is working. Those who choose this plan also are encouraged to use the money they were paying toward the lower-balance card to add to the next card on their pay-off list.
• Pay more than the minimum. Regardless of the plan you choose, paying more than the minimum required by the credit card company each month is a no-brainer. Assume, for example, you have an outstanding balance of $5,000 with an annual interest rate of 12 percent and a minimum monthly payment of 2 percent. If you pay only the minimum ($100) and have no additional charges, $50 of the payment goes to pay the interest and your balance is paid down to $4,950. Following this schedule, it would take you almost 25 years – 299 months – to pay off the balance. On the other hand, if you paid $250 each month, you would have the balance paid off in about 23 months.
• Time to transfer? Shopping around for a card with zero- or low-percent interest rates that will allow you to transfer your balance might be an appealing option. There are some important factors to consider, though, including how long the offer will last once the transfer is made. If the rate jumps from 2 percent to 18 percent after 12 months, for example, make sure you’ll be able to pay off your debt in that amount of time. You’ll also want to consider whether a zero-percent interest rate for six months is better than a 2-percent rate for 18 months, depending on your situation. You’ll also want to find out if a hefty transfer fee is involved, if there are stipulations requiring you to keep your balance with the new company for a set period of time, and any other condition that might be buried in the fine print of the agreement.
• Is your creditor compassionate? Some people might be surprised to find out credit card companies sometimes will lower your interest rate if you simply ask. Some are willing to give you a significantly lower short-term promotional rate, while others will reduce your annual percentage rate. Either way, you might benefit. And if you’re wondering, many credit card companies are willing to budge in this regard due to the fierce competition for customers. It also helps if you’ve been a good longtime customer.
• Place a call to the pros. There are numerous consumer credit counseling organizations that can help you craft a plan to work your way out of credit card debt. Look online or in your phone book for an organization who will provide this service free of charge. Be wary, meanwhile, of any group that offers to help you eliminate your debt easily for a fee. If the offer seems too good to be true, it probably is too good to be true.