Steps To Eliminate Credit Card Debt

Credit card debt is a major problem in this country. While not everyone has a credit card, those that do typically carry a balance. The interest rate on a credit card balance is usually between 10-30% APR. These high interest rates make it difficult for people to pay down their debt -- especially if only making the minimum payment. In fact, just making minimum payments can make even the smallest balance over a decade to pay off and thousands of dollars in finance charges.

It’s no wonder getting out of debt seems so hard.

Fortunately, you can get out of debt. If you follow a few basic steps and put a plan in place, you can work to pay off your debt sooner, with less interest, and improve your credit score in the process.

1. First, list each of your credit cards. You’ll want to include the outstanding balance, interest rate, and minimum payment. This information can easily be found on your last monthly statement.

2. Order the cards on the list so that the credit card with the highest interest rate is at the top, and the lowest is at the bottom.

3. Total the minimum payments. The total monthly minimum is your absolute lowest monthly payment, but remember, we want to pay more than the minimum in order to repay the debt quickly. So, take a look at your budget and see how much extra you can come up with each month in addition to the minimum. Whether it’s an extra $20 a month or $100, every little bit helps.

4. As your payments come due, pay the minimum on each card except for the one at the top of your list. Remember, that one has the highest interest rate and it costing you the most money by maintaining a balance. So whatever additional money you budgeted in the previous step, apply that to that card.

5. Continue this process until the first card is paid off. When that card is paid off, continue with the minimum payments on the other cards, but now take the amount you were paying on the first card in addition to the minimum payment and apply it to the second card on your list.

6. Repeat this process until all cards are paid off.

Why This Works

To understand why a relatively simple process works it’s important to understand how minimum payments work. Minimum payments are calculated as a percentage of the outstanding balance. That means as your card balance slowly decreases, so does your minimum payment. This is why it can take ten years or more to pay off even a small balance if you only make the minimum payment each month.

With this system, your monthly payment is remaining constant regardless of your balance. So each month your required minimum payment may go down, but you’re ignoring that and by doing so you apply more and more money to your principal as time goes on, thus accelerating your debt repayment.

Starting with the highest interest rate ensures you’re targeting the most costly credit up front to minimize the total amount of interest you pay.

A Few More Tips

While this payment strategy will help you get out of debt, you can potentially make things go even faster with a few other tips. First, call your credit card company and ask about getting your rate lowered. This won’t always work, but if you have been on time with your payments and a decent credit score, they may be willing to work with you. It doesn’t hurt to try and it doesn’t cost anything. The worst they can do is say no.

Don’t forget about balance transfers. Again, it isn’t always easy to get credit and the balance transfer deal may not be the best, but if you can find a way to transfer the balance from a card with a 25% APR to a card with an 18% APR, that’s still something. There may be some special 0% offers as well, but they are harder to come by these days and the hidden fees may outweigh the benefit.

Finally, keep in mind that this process still takes time. There is no magic method of paying off debt, so realize that it will still take months or even a few years to become completely debt-free. But what we're doing is putting a process in place to make sure that you can get out of debt as soon as possible. You can speed up the process if you continue to pay even more money towards your debt as your budget allows.

Source: thebalance.com

5 Steps To Start Paying Off Your Debt

One of our human instincts when feeling overwhelmed is to bury our heads in the sand. This holds true for millions of Americans. We spend, we ignore and await the outcome.  Ignoring your debt will not make it disappear.  Before I continue, I should tell you who I am.  My name is Genevieve Dobson and I am an author and student loan/debt management expert with over a decade of experience.  I have helped thousands of clients save millions of dollars but more importantly, I saved them undue hardship and stress.

So you don't pay your credit card bills, big deal, what is the worst that can happen?  You are unable to get future credit.  You may be able to make sense of that in your mind but I have to say having the ability to obtain credit can be life changing.  Now, with that said, that is correct, the worst that will happen by not paying credit card debt is the inability to obtain future credit, but that is not the worst thing that will happen if you do not pay on your student loans.

There is no excuse for any student loan borrower's loan to not be in current standings! There is no reason why your driver's license should be revoked, your tax return and wages to be garnished, or for you to be receiving endless collection calls and letters.  (See:  http://blog.degreesofsuccessinfo.com/2015/04/do-you-know-real-secrets-behind-debt.html)  YOU have no excuse to be delinquent on your student loans because there are many options for you to remain in good standings.

  There are repayment options available to pay only 10% of your gross income, there are several ways to have your loans forgiven (yes YOU!), there are ways to save money by paying your loans in a certain way and in the worst cases, there are options for you to defer or forbear your loans (which means delaying the repayment for a period of time).

  None of these options will negatively affect your credit EXCEPT IGNORING THEM. 

Paying off your debt is not a one-size-fits-all but taking these steps will get you started:

1.  If your student loan payment is too high, apply for a repayment option on your student loans that will reduce your monthly payment amount.  There are plans such as Income-Based Repayment that will reduce your monthly payments to 15% of your gross income.
2. If you only have enough money to pay either your credit card or your student loans, pay the credit card.  Eliminate your monthly student loan payment by applying for deferment or forbearance.
3. Take the money initially slated towards your student loans and apply to the credit card with the highest rate and lowest balance. 
4. If you are lucky enough to have enough money to expedite the repayment of your debt, you should pay your credit card balances in full every month.  For your student loans, you want to put extra money toward the highest rate debt first.  People often mistake the quicker repayment of lowest balances instead of highest rates. 

1. Always, regardless of whether or not you have the money to pay your student loans, research government student loan forgiveness options and employer contribution plans.  Why pay money that you do not have to?

Sometimes it is best to contact an expert as it does take many hours of research to know the best way to tackle these loans, but if you take the step of responsibility and use a small amount of determination, it can be done. 

In summation, know your debt repayment options; no excuses.

Genevieve Dobson (Gen) is a student loan expert, debt management specialist and three-time author who has spoken at Howard, Temple, Rutgers and other universities. An invitee of Oprah’s Lifeclass show, she is the owner of Degrees of Success which was named the Best of Tampa for Debt Management in 2013 and is the founder of the financial empowerment series, Stress 2 Success: Debt Management and Wealth Building, which tours the U.S. 

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

How to Establish Credit

When you don’t have a credit history, it can be difficult and frustrating when trying to obtain a credit card or other type of loan. Establishing your initial credit history can be a Catch-22. If you don’t have credit, not many places are willing to give you credit, yet how can you ever establish credit if nobody is willing to give you any?

Understand What Lenders Are Looking For

Since you are looking to establish credit for the first time, lenders can’t look to your FICO score to determine whether or not to lend you money.

In these situations, they have to examine other factors that can help them decide if you are a credit risk or not.

• Bank accounts. You don’t need a credit score in order to open a checking account at your local branch. Since it doesn’t require credit to open, it also doesn’t get reported to the credit bureaus to establish any credit. Even so, your account history can be a vital component when lenders consider giving you a credit card or loan for the first time.
   
• Employment history. Another important factor lenders look at is your employment history. They want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a steady job can improve the likelihood of getting approved.
   
• Residence history. Lenders will also look to see how often you move and whether you rent or own. As with employment history, it pays to have a stable residence. Owning a home, even if just jointly with a spouse, carries some weight as well.
   

• Utilities in your name. Even without a credit history, it is possible to sign up for many utilities in your own name. Having an electric or gas bill, telephone, cable, or water service in your name also helps. Just having your name on these accounts won’t establish a credit score, but it can be helpful for first-time borrowers.

Start With Your Bank

There are a few things you can do that can help in your quest for establishing credit. The first thing you should do is open and maintain a checking and possibly even a savings account at a local bank. This is helpful in two ways:

1. When you have active bank accounts in good standing, you are proving that you can manage money. While bank accounts aren’t typically a part of your credit score, lenders can use this information to determine whether or not you are a credit risk.
    
2. Establishing a relationship with a bank will improve your chances of obtaining a loan or credit card through them. If you already do business with a bank, they should be the first place to look. They know you and they value your business. This existing relationship should carry some weight when seeking credit.

Consider a Department Store Card

You’ve probably been shopping at the mall and been asked if you’d like to sign up for their store credit card to save 10% on your purchase, but politely declined.

Generally, store cards are a bad idea because they lure you in with that up-front discount, and then the ongoing interest rate is very high.

Avoiding these cards is typically a good idea, but the ease of obtaining one may actually be a good thing if you’re having trouble establishing credit. If you have struck out at the local bank, you may want to consider checking with one of the local department stores and see what type of cards they offer. Whatever you do, make sure you find out whether or not they report to the credit bureaus. If they don’t, it will do you no good.

If you are approved for their card, you need to be disciplined and use it properly. Don’t treat this new purchasing tool as free money, but only as a means to establish good credit. The limit will probably be low anyway, but you should make an initial purchase with it and subsequently pay the balance off in full. Once the card is active, it should begin to be reported to the credit bureaus. It is now important to maintain a good payment history on this card so your credit history can build upon it.

When All Else Fails

If you’ve tried the bank, department store, or even credit card companies directly and failed, not all is lost. Secured credit is a last resort, but it is much easier to obtain than unsecured credit.

When a credit card or loan is secured, it means that there is an asset linked to the account that the lender can take if you fail to make payments. When you have a mortgage or auto loan, these are secured loans. If you fail to make payments, the lender will take your house or car in order to satisfy the debt.

You can establish the same thing at most banks with a secured credit card. You can pledge money you deposit in an account to secure the credit card. For example, you could obtain a secured credit card with a $500 limit if you put a $500 deposit in the bank that is linked to the card. If you fail to make your credit card payments, the bank takes your deposit.

Again, you want to check and be sure that this secured credit is reported to the credit bureaus, but if so, this can be a useful tool to establish that first piece of credit history. After you maintain that account in good standing for a while, you may be able to obtain a regular credit card or loan.

Establishing Credit is Only the First Step

Establishing a good credit history takes time. There are no shortcuts or tricks that can take you from no credit at all to a high score in a matter of months or even a few years. Your credit score is based on a number of factors such as ​payment history, length of time you’ve had credit, and much more. So, while it is important to initially establish credit, it is even more important to take the time to do the right things to maintain good credit.

How to Reduce Your Average Monthly Credit Card Payments

If you've always focused on the minimum payment due for your credit cards, rather than the total balance, you're not alone: many people use their credit cards this way, paying only the minimum (or perhaps a bit more if they think they can afford it that month).

In fact, the average American household with a credit card balance owes nearly $10,000, and total revolving debt (which consists mainly of credit card debt) in the U.S. is close to $1 trillion.

That's a lot of money.

Having significant credit card debt impacts your credit score, costs you plenty in interest, and may prevent you from making large purchases, such as a house or a car. Fortunately, there are strategies you can use to begin paying down your balance, which in turn (eventually) will reduce your average monthly credit card payments.

What Are Credit Card Minimum Payments?

Many U.S. banks require credit card holders to pay 4% of their balance every month (this was increased from 2% of the monthly balance years ago following the financial meltdown in 2007 to 2009). At the time of the increase, this produced some sticker shock (and even worse effects for those who had overextended themselves financially).

But in the long run it actually was good news for consumers, since they were forced to pay higher monthly minimums.

Look at it this way: paying 2% of your balance each month barely covers the interest, and leaves very little to apply to your actual balance.

That's why, if you owe $2,000 or more, and you only pay the minimum balance of 2% each month, it will take you approximately 30 years to pay off your balance even if you never charge another penny.

By paying 4% every month, you pay enough to cover the interest and have enough left over so you could pay off your balance in 10 to 12 years if you don't add any new charges.

This is good because you'll get out of debt sooner and you'll pay a lot less interest over the years (thousands of dollars for many people).

How to Pay Down Credit Cards Faster

As you might gather from the above example, it benefits your finances significantly for you to pay more each month on your credit card debt. That's what you should try to do.

Now, this isn't easy, and many people get discouraged when they take a close look at their finances, especially if they're stretched thin. But you don't have to boost your payments by hundreds of dollars each month — putting just a little bit of extra money toward a credit card balance can add up surprisingly quickly.

Here are the steps you should take:

1. Go through your credit cards (most people have more than one with a balance) and determine which one carries the highest interest rate. Focus on that one.
2. Determine how much extra you can afford to pay on that one card each month, and set it aside. Consider creating an automatic payment so that you're not tempted to use the money for something else.

1. Don't worry about how long it will take you to pay off the card. Just keep making those extra payments, re-evaluating your finances periodically to see if you can afford any extra towards the balance.
2. Pay the minimum payments on the other cards you have.
3. Once you've paid off that card (regardless of how long it took), choose the next card with the highest interest rate, and begin paying that off. Since you've cleared one monthly payment by paying off the first card, this card will be easier.
4. Repeat as necessary until you've cleared all your credit card debt.

Also, while you're in the midst of this process, think twice about adding any debt to your credit cards. Consider setting aside one card (hopefully one with no balance on it) for household expenditures, budget for those expenditures, and pay the balance due on that card every month.