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Guide to Paying Off Credit Card Debt

April 27, 2009 by PlasticEconomy.com

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.

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