Eliminating Credit Card Debt For Dummies

There are many different types of debt, some good, most bad.  Credit card debt is decidedly in the “bad debt” territory, just behind payday loans and title loans.  Approximately 73% of all American households possess a credit card, with the average credit card debt of households with at least one credit card at the end of 2008 reaching $10,679.  What’s more, credit card balances are rising, not declining, and our collective debt levels pose a serious threat to the economy.

Why Eliminating Credit Card Debt Should Be A Priority

The rule of thumb is that if you can’t reasonably expect to earn a higher return on your money elsewhere, you should use excess cash to pay down your debt.  Why?  Because by carrying high-interest credit card debt you are making the bank rich, not yourself.  The average interest rate is currently around 15%.  That means for every $1000 you borrow on your credit card, you will pay $150 per year for the privilege.

To put that number into perspective, if you invested that same $150 per year in a retirement account and earned a long-term average of 8% per year, you would end up with over $20,200 in 30 years and over  $47,200 in 40 years.  That is an absolutely staggering amount of money when you think about it.  In a very real way, that $1000 purchase on your credit card isn’t just costing you $1000 plus the $150 interest payment, it’s costing you almost $50,000 over 40 years because not only do you lose the money paid to your credit card company as interest, you miss out on any potential interest those payments could have earned you.  Due to the miracle of compound interest, it doesn’t take long for the opportunity costs to dominate the equation.

The Basics Of Eliminating Credit Card Debt

Debt consolidation is big business, but completely unnecessary.  There’s absolutely nothing credit consolidation companies can do for you that you can’t do on your own.  Besides, do you think those consolidation companies are working for free?  I don’t think so.  Here’s all you need to know to eliminate your credit carrd debt as quickly as possible.

• Pay Off Your Highest-Interest Card First – Dave Ramsey teaches his students to pay off the card with the lowest balance first in order to give them a psychological boost at having accomplished a goal, however small.  Self-esteem is all fine and dandy, but the laws of mathematics state you should pay off the highest-interest card first.  You will end up paying less in total interest as a result and will eliminate your balances more quickly.  If you want to feel good about yourself, follow Ramsey’s advice.  If eliminating credit card debt as quickly as possible is your goal, pay down your highest-interest debt first.  Then pay down your second-highest-interest debt, etc.  Which will make you feel better in the long run, paying off that $50 sweater you bought on your Gap credit card or being completely debt free?
• Call And Ask For A Lower Rate – This is where the debt consolidation companies love to toot their own horn.  They justify their fees by saying they will negotiate with your credit card companies on your behalf to get your interest rate reduced.  Thing is, there’s absolutely no reason you can’t do this yourself, and you are at least as likely to get a rate reduction as the debt consolidation companies are.  Just call your lender up, explain that you really want to do the right thing and pay what you owe but you’re afraid you won’t be able to keep up with the minimum payments unless your interest rate is reduced. Most credit card companies will jump at the chance to help out a well-meaning customer.  Losing a points in interest is better than losing everything if you declare bankruptcy or simply decide not to pay.
• Ask For A Balance Reduction – Getting your balance reduced outright is much less likely than getting your interest rate reduced.  Still, it’s worth asking.  If you are truly in dire straights the credit card company might decide to take what they can get.
• Do A 0% Balance Transfer – This probably isn’t an option for many consumers these days without decent credit.  Still, it’s worth a shot checking out some 0% balance transfer cards.  Not having to pay any interest on a few thousand dollars will free up a lot of extra cash to put towards principal, or perhaps another high-interest balance you weren’t able to transfer.
• Do NOT Use Home Equity To Pay Off Credit Cards – Credit card debt is unsecured debt.  If you simply decide to stop paying, the worst they can do is ruin your credit.  Your Home Equity Line Of Credit (HELOC), on the other hand, is secured by the value of your home.  If you default on your HELOC payments, you could very well lose your home.  It’s not worth the risk.