Guide to Paying Off Credit Card Debt

There are a number of people with credit card debt make minimum payments every month without thinking about actually paying the debt off. The first step is to develop a sincere interest in credit improvement and debt reduction. From there you can create a workable plan that suits your personal financial situation.

Basic Debt Reduction: An Overview

Large amounts of debt can be overwhelming. You may feel like you will never get out from under the mountain of debt you’ve accumulated. Organization can be helpful because once you sort things out and analyze them it becomes easier to manage and reduce your debt.

For example, you will need to list all your creditors and how much you owe. Keep the phone numbers and addresses of your creditors close at hand so contacting them is easy. Next consider which accounts you should pay in what order. Another important factor is the amount of money to pay each one. Breaking the process down into small steps can help you create a budget that suits your life.

Figure Out How Much You Owe

A good place to begin when creating a debt repayment plan is calculating the amount of money owed and who the money is owed to. You will need a current copy of your credit report to obtain this information. On your credit report will be listed each creditor and how much you owe each one. Just in case all accounts are not listed also look over current bills you’ve received in the mail from creditors which may not have been reported yet.

It helps to list the information on one sheet of paper so you aren’t buried in paperwork. Make a few copies of the completed document in case you lose the original. On the page you will want to list the following.

• Creditor name
• Total amount of money owed
• Minimum monthly payment
• Interest rate

This information can be done in a three-column format. Your entries may look like:

• Visa $3,040 $126 9%
• Belk card $9,420 $366 11%
• SunTrust Bank personal loan $23,000 $490 6.6%

This is of course just an example as your list will vary depending on your individual financial situation. Keeping your list close at hand when paying bills can really help you stay organized and boost your chances of debt repayment success.

List Your Creditors by Priority

After making your detailed debt list, the next step is deciding which creditors get paid when and how much. A good rule of thumb is to pay off the accounts with the highest interest first. Listing your debts in order from high to low interest rates is recommended.

Another way to repay debt is focus on the smallest accounts first. The reason to do this is because smaller amounts of money can be repaid faster. Once you’ve got the more manageable credit accounts taken care of you can tackle the big ones. The method of prioritizing your creditor you choose will depend on your personal debt profile.

Develop an Affordable Repayment Plan

It is extremely important to tailor your debt repayment plan to suit your finances. Figuring out how much to pay towards your debt can be done by determining the amount of discretionary income you have. Discretionary income is the money left over for spending after you’ve paid all your necessary expenses.

First, add up the money coming in each month from sources like your wages, tips, child support, alimony and any other sources. Subtract your monthly expenses from this sum. Monthly expenses include anything deemed necessary like rent or mortgage, utilities, food, car payment, insurance, medical care, current debt payment and anything else you absolutely must pay. The amount left over equals your discretionary income.

Now that you have a clear picture of how much is left over you can apply the amount you choose towards your unpaid debt. Rather than applying the total amount subtract the amount you know will probably be spent on non-necessities that are still important to you. What’s left can be divided among your creditors as you see fit.

Create Your Repayment Strategy

With all the numbers in front of you, it will be easier to complete your debt repayment plan. Apply the money you’ve earmarked for debt repayment to the creditors you determined as high priority. This will involve making not only the minimum payment but also paying the amount you determined you can afford to get the debt paid in full. Once the debt is paid go down the list and apply the extra funds to the next creditor. You should of course continue paying minimum payments on all other creditors.

Launch Your Debt Elimination Plan

Suppose you’ve allotted $200 monthly for debt repayment. Start with the number one creditor on your priority list, and pay $200 in addition to the minimum payment. Continue to do this each month until the account is paid in full.

The next step is to apply the $200, the previous minimum payment of the now-paid debt and the current minimum payment of the next debt on the priority list. As you move down the list of creditors you will free up more funds to put towards your debt.

Eventually, depending on how much money you’ve decided to put towards your debt and how much debt you have, you can be debt-free and stay that way. The rewards of eliminating debt include more money for savings, a better credit rating and reduced financial stress. So don’t delay, create your debt repayment plan and get on the road to financial stability.

Considering Filing for Bankruptcy?

Bankruptcy carries a bad reputation and it’s no wonder. Once you file for bankruptcy your credit is negatively affected. The chances of obtaining new credit for a loan or credit card are slim to none. While it’s true bankruptcy will be removed from your report in 7 years (or sometimes as many as 10 years) many creditors do ask if you have ever filed for bankruptcy and by law you are required to tell the truth no matter how long ago it was.

If you can somehow repay your debt without turning to bankruptcy you should. In addition to impacting your credit, bankruptcy can even impact your emotional health. Many filers feel regretful and embarrassed long after they’ve declared bankruptcy. So before you make the decision to file, consider some alternatives first.

Often creditors will be happy to negotiate a reduced payment or debt settlement with a customer considering bankruptcy. Even if you’re several months late this can still be achieved.

Another thing that can help you is consumer credit counseling. These agencies evaluate your debt situation and negotiate with your creditors on your behalf. You pay the credit counseling agency a lump sum every month rather than sending payments to all your creditors.

In some cases, bankruptcy is the best solution. For example, if you are so late on a payment that your wages are garnished, filing for bankruptcy may cease the garnishment. Another situation where bankruptcy may be appropriate is with high medical bills not covered under an insurance plan. If you are in dire financial straits bankruptcy may be your last resort and prevent court judgments.

Because every financial situation is different, what works for one person may not work for another. The information in this article is not legal advice, so if you’re considering bankruptcy you need to consult with an attorney. You may want to consult with more than one attorney before deciding who you want to use, especially if the initial consultations are offered free.

The right attorney will explain the bankruptcy process in detail, answer any questions you may have and give you honest advice about whether filing bankruptcy is recommended for your situation. It is important to weigh all the pros and cons of this decision as it is one that will affect your credit for years to come.

Dangers of Debt Settlement

These days advertisements for debt settlement companies are all over the TV, Internet and radio. The promises of decreased debt can be quite tempting for consumers who are struggling financially. However, it pays to get all the facts before turning to a settlement company to handle your debt problem. While these companies promise to reduce your debt what they may not be clear about is the effect of their services on your credit report.

The first step in debt settlement is providing the settlement company with details regarding your creditors and how much you owe each one. This information will be analyzed and the debt settlement specialist working with you will devise a repayment plan supposedly designed to reduce your debt and save you money. You will pay a monthly payment to the settlement company who will distribute it among your creditors.

So what does the settlement company get out of the deal? They take up to four of your payments as compensation for their services. After that, your payments are put in an account and when it has reached a certain balance the settlement company will negotiate debt settlement details with your creditors. While the idea of paying off your debt this way may seem convenient, there are some hidden drawbacks.

A creditor is only able to settle an account after it is charged off. In order for an account to be charged off, there must be six months of consecutive non-payment. This racks up late fees and shows up in a negative manner on your credit report.

You may already know that an item can stay on your credit report for seven years, however you may not know that time resets when you make a debt settlement. When the settled debt is paid off, it is not removed from your credit report. The debt will be marked Paid Settled or Charged-Off Settled.

If you’re overwhelmed by debt consider various alternatives to debt settlement. Credit counseling is one alternative that can help you pay down your debt in a convenient and effective way. You might also want to consider negotiating with your creditors on your own. Many creditors do have special hardship programs for those experiencing financial problems. These programs may reduce your late fees and interest rate for a specified period of time while you get your finances in order.

Types of Bankruptcy

The Constitution of the United States gives citizens the right to relieve their debt when unable to repay lenders and creditors. There are two main types of bankruptcy — Chapter 7 and Chapter 13. Understanding the difference between these two types is important for anyone considering bankruptcy.

Chapter 7

With Chapter 7 bankruptcy, you can discharge some or all your debt owed following the application of liquid assets to debt owed. Liquid assets can be turned into cash easily and quickly. Examples include money held in a savings or checking account. Some liquid assets are exempt, however this is something that varies from state to state. After the application of the liquid assets to your debt, the remaining debt is charged off. The creditors and/or collection agencies to which the debts were owed cannot try to collect them anymore.

To file for Chapter 7 bankruptcy you have to get credit counseling from an agency approved by your state, and you must meet certain income requirements. Your income must be less than the median for your state and family size. If it is not, you cannot file this kind of bankruptcy. You can consider filing Chapter 13 bankruptcy.

Chapter 13

Chapter 13 bankruptcy is different from Chapter 7 because you actually repay your debt via a payment plan stretched out over three to five years. When filing for Chapter 13, you will have to present a repayment plan for court approval. The payments go to the court, who in turn distributes it to your creditors. Your creditors do have the option of objecting to the repayment plan, however the decision is in the judge’s hands.

This type of bankruptcy might be the right choice for you if your debt is secured, such as a car loan with a lien on it. Unlike Chapter 7 bankruptcy, Chapter 13 does not require you to use your liquid assets on debt repayment. With Chapter 13 bankruptcy you are still required to undergo credit counseling.

Because bankruptcy is a complicated legal process it is best handled by an experienced attorney. A bankruptcy attorney can help you choose the right type of bankruptcy filing, handle the legal paperwork and guide you through each step of the filing process.

Many attorneys offer free consultations where you can find out more about what they do and how much their services cost.

What debt to pay off first?

There are two ways to approach paying off your debt.

Snowball Debt Approach

This approach requires that you pay all the minimums on all your debts except for one (usually the smallest one).  Every month, you pay the absolute highest amount possible until it’s gone.  Once you’ve paid off the first debt, you take whatever you were paying on that debt and put it toward your next target (along with the minimal payment it used to have).

Once you pay off the second debt, you move onto the third debt where you pay the first minimum payment, plus the second and third minimum payments in addition to any extra you can handle.

This method is called the snowball approach because the amount you’re paying into each debt continues to grow (like a snowball) after each new debt is paid off.  For example, if you had six credit card payments all with a minimum payment of $100 a month, plus another $200 a month you could pay towards them ($800 total a month), you’d start the snowball approach by paying $300 toward one debt.  Once that was paid off, you’d pay $400 on the next debt, then $500 when that’s paid off, etc.

Mathematically Speaking

While it sounds like a good approach, not all financial advisers believe that it’s the best way to pay off your debts.  While the snowball approach is good because it keeps you motivated as you keep seeing credit card accounts hit $0 owed, mathematically speaking it makes sense to concentrate on paying off the cards with the higher interest rates first.

When it comes to paying the higher interest rate first, you also have to consider the balance on these cards.  You may have a card with an APR of 29% and a balance of $900, but you also might have a card with an APR of 27% and a balance of $3,000 — obviously, paying the higher interest rate off first would be more costly.

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