Financial Pathways: Pay off credit card debt and get that monkey off your back (column)
Mary writes: I enjoyed your article in the Summit Daily about credit scores. My six credit cards are all within 90 percent of their max, and it has been detrimental to my credit score. I have about $40,000 in debt. Over the past year I’ve stopped using them, but by paying only a bit over the monthly minimum, I am not making progress on paying them down. I don’t have any savings and that is worrisome. I would like to know if you can recommend the best way to pay down my credit card debt and climb out of this hole. Thank you!
You have taken the first step to taking control of your debt by no longer charging on your cards. No doubt you have made some sacrifices to do that. Now you are experiencing how making minimum payments will not pay off debt and it just keeps you treading water until the next month. Many people get into this vicious cycle and cannot, as you said, “climb out of the hole.” The approach to overcoming this seemingly insurmountable problem is not necessarily the same for everyone. The amount of credit card debt you have, your income, your savings and your need for credit all have a bearing on how you proceed. In your case, Mary, I don’t know if you have your own home or still need to buy one, and I don’t know your income. I do know that the amount of debt you mentioned does require that some aggressive action to be taken to overcome the problem. Moving your debt around from zero interest credit card to zero interest card is not the answer. It will not get your debt paid off and applying for more credit will hurt your credit score more. Here are some ways you can take control:
1. Usually the first step I would suggest to most people is to take money from savings and pay off the debt with the caveat that this is a one-time event and you will change your spending habits going forward, and the credit cards will not be overused again.
2. If you have a life insurance policy, take some of the cash value to pay off credit card debt.
3. If you have your own home, consider a home equity loan to pay off debt and then pay off the loan as quickly as possible.
4. If none of the above is feasible, I would see about getting a debt consolidation loan at the lowest possible interest rate and pay off all the credit card debt and make one monthly payment. Then, with the extra funds make extra payments to pay off the loan and start saving some money. Use only a gas card and a credit card sparingly and pay off monthly. Do not dig yourself into another hole.
5. If unable to get a debt consolidation loan, call your credit card companies and explain your situation and ask them to work with you. Attempt to get a zero percent interest rate on all of your credit cards. Take it up the chain of command if necessary to get satisfaction. They would rather get no interest than you default on the cards. Explain that may be what you have to do otherwise.
6. On any cards that you do have to pay interest, always pay off the card with the highest interest rate first, regardless of the balance, then pay off the one with the next highest rate and so on.
7. As you pay off credit card debt, your credit score will go up. Put the higher interest cards away or cut them up, but do not close the accounts. You want to show that you have been entrusted with the credit, and the longer you have had accounts the better it is for your credit score. Never close older accounts.
8. Review your spending and find ways to cut back on unnecessary expenses so that you can apply more of your funds to paying off debt quicker.
9. Once you pay off the debt, you will feel like a heavy weight has been lifted from your shoulders. The next time you think about putting something on a credit card that you cannot afford to pay off at the end of the month, remember how it felt to be burdened with credit card debt and walk away from the purchase.
I hope this helps, Mary. Please contact me with any additional questions you may have.
Nancy Gardner is a Certified Financial Planner. She and her husband Bill and their dog Daisy split their time between Summit County and Montgomery, Texas. Send questions to Nancy: firstname.lastname@example.org.
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