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Q. I've managed to get myself into about $10,000 of credit card debt. Okay, I'm an idiot, but spare me the lecture. My concern now is, how do I get rid of it once and for all?
A. Okay, I won't lecture you. I'm sure you have already discovered how harmful a large debt can be to your finances, and you're hardly the first person to make this mistake. Even in this economy, when people are finally focused on living within their means, the average American has more than $5,600 in credit card debt. Yours is nearly twice that. With a typical interest rate (about 15 percent), your debt is costing you around $1,500 a year in interest.
I won't sugarcoat it -- getting debt-free is a long, hard process, but you can shorten it by having a plan. Follow these six steps and you'll have a good chance of paying off your debt and improving your credit rating.
1. Stop using credit cards. This is difficult -- I've seen grown women cry when handed scissors to cut up their cards -- but non-negotiable. The only way you can get out of a hole is to stop making it deeper, especially since, once you carry a balance, interest costs are added immediately to every purchase you make. So go cold turkey.
2. Create a budget. Figure out exactly what you bring in each month and how much you spend. (Use a program like Quicken or sit down with a calculator, your bills, and your pay stubs.) After paying for essentials -- mortgage, car or transportation, utilities, groceries -- apply the bulk of what's left toward your debt. The numbers will probably be tight, so you'll have to cut out most of your discretionary spending, or else find a way to increase your income (which might include looking for a new job or even taking on a second one).
3. Stay current with your bills. To protect your credit rating and avoid even more fees and interest, you must make each card's minimum payment by its due date, without fail. If you've lost track of all you owe -- perhaps an old store credit card has fallen through the cracks -- pull your credit report for free at annualcreditreport.com and see the complete list. If you can't afford your minimum payments, contact the credit card companies and explain the situation; they may reduce your payments temporarily. Or you may need to visit a nonprofit credit counseling service (find one at nfcc.org), which can renegotiate your interest rates for the long term and create an affordable payment plan. (Beware of for-profit services; unfortunately, the field is rife with charlatans.) How do you find a reliable nonprofit? Here are a few guidelines: A single visit to get you on track should be free; if you need ongoing help, the cost should be less than $50 a month; and no one should offer you a "consolidation" loan.
4. Power-pay one bill at a time. I'm assuming your debt is spread over several credit cards. After you've made all your minimum payments, throw every remaining dollar of your debt-repayment budget at the card with the smallest total balance. This strategy will allow you to clear that debt and thus reduce your monthly bookkeeping burden. Keep going like that and as you close out balances, you'll have more money to devote to making a larger "power payment" to the next account in line.
5. Be wary of low-interest transfers. If your credit score is still strong, you may get offers in the mail for new cards with low introductory interest rates. You can transfer a balance from a card with, say, 12 percent interest, to one at 5 percent, or even lower, for the next six months or a year. This can speed your debt recovery, but realize there are pitfalls: (a) Many cards charge a 4 percent fee for balance transfers; (b) when the teaser rate expires, you may face a higher interest rate than the one on the bill you transferred; and (c) having a new card may tempt you to charge more purchases, which not only undermines your progress but could even void your low interest rate. (Sorry, you'll have to cut up this card, too.)
6. Reward your success. Eliminating $10,000 in credit card debt will take years of belt-tightening. To ensure that you don't fall off the wagon, treat yourself now and then. Go out to dinner and a movie, get your son that video game he wants, and take modest vacations. But whatever you do, don't charge any of it on plastic.
Credit expert Gail Cunningham is vice president and chief spokesperson for the National Foundation for Credit Counseling, a network of 90 nonprofit agencies around the United States.
Originally published in Ladies' Home Journal, September 2012.