Tips for Getting Out of Credit Card Debt
Easing the Financial Burden.
The first piece of advice that some counselors will give you when you have too much credit card debt, is to cut up all of your credit cards. In fact, while sometimes this may be a wise strategy, it’s not always a good idea. To be sure, if you’re addicted to spending, have no control, and are using one credit card to pay off another, then it may be a good idea to just get rid of all of them.
But not everybody is in that boat, and not everybody has that sort of addictive personality. Are you the sort of person who can smoke one cigarette? Put a quarter in a slot machine and walk away? Enjoy half a glass of wine and then drink ice water for the rest of the meal? Given the right circumstances then, you’re probably able to handle your credit cards as well. In such a case, the problem isn’t credit cards per se, but too many credit cards. Don’t cut all of them up, but do choose one with a moderate credit limit, keep it, and get rid of the rest of them. Giving up cards altogether may be a bad strategy, because when used responsibly, having a good credit card can help you smooth out the highs and lows, enjoy conveniences, and avoid having to pay substantial cash deposits.
Have you ever tried to rent a car without a credit card? If you’re lucky enough to even find a rental agency that will talk to you, they will require a large cash deposit before you drive away. Having the card will also let you take advantage of online purchasing, and the many discounts you may be able to receive when you buy things online. Airlines, for example, often have special “online” rates available only when you book online—when you call them on the phone, you can’t get that same rate.
So - step one is to narrow down your wallet to just one card. Then, you have to do something about the debt that you already have. Your first priority is to the remaining card issuer, and you should pay more than the minimum payment every month on this one, so you can maintain your good standing, and keep your credit line available for emergencies. Then, you need to tackle the rest of the debt. Since you’re not using the rest of the cards any more, your debt won’t increase, but you still need to make timely payments on the remaining debt, of at least the monthly minimum.
Also, while using cash advances from one card to pay off another is a bad strategy, some debt shifting may help you, if you’re shifting debt from a high-interest card to a low-interest card. If that is a possibility, then do it—you will be able to pay off your debt sooner while still paying the same amount every month.
Another debt shifting strategy is to use a home equity loan to pay off credit card debt, although this strategy should be used with caution. The net result, if done right, is that you will have a lower and more manageable monthly payment and you will pay less interest, and probably pay off your debt sooner than you would otherwise. These are desirable end results.
However, when you use home equity to pay off credit card debt, you are shifting unsecured debt to secured debt, and that can be a dangerous strategy if you’re living on the edge. When you fail to pay an unsecured credit card, you suffer a loss of good credit, and may get a lawsuit—but when you fail to pay that secured home equity loan, you may lose your home.
The home equity strategy is good only if you do not continue to increase your credit card debt after taking out the equity loan, and if you have a continuing source of reliable income. Take the home equity strategy only if it will result in substantially lower payments, and then, take some of the money you save every month and bank it, so you will develop a savings cushion for future emergencies.
Additional resources:
Six Steps to Eliminating Credit Card DebtFoolish Calculators (Fool.com)
How to Get Out of Credit Card Debt Tutorial?
When You Should and Shouldn't Use Credit Cards
Comments