Pay Off Your Debt Without Ruining Your Credit Rating
There are lots of ways to eliminate your credit card debt. You could declare bankruptcy, you could call one of those “secrets the credit card companies don’t want you to know” places and really destroy your credit rating, or, you could follow my simple plan for paying off all your charge cards, while actually improving your credit score.
Now the plan is simple, but it is not easy. To make it work you are going to need to exercise a large amount of self control, and be committed to paying off your charge card account debt.
Paying off your debt is going to have to become more important to you than having the latest car, the biggest house, or even the nicest shoes. In some cases, to pay off your debt you are going to need to make some sacrifices in your style of living.And it won’t happen overnight.
Paying off your charge card debt is a lot of hard work, but the rewards are outstanding. If you follow my plan, not only will you pay off your credit card accounts, at the same time you will be building an emergency fund savings account. Imagine how it will feel to be debt free, and with cash in the lender. Imagine not needing to worry if your car needs repair. Imagine what it would be like to on a first class vacation, and not have to worry about paying the bills when you get home.
I know what I am talking about. There was a time when I had almost $30,000 in credit card debt. Plus a mortgage! 5 years ago I paid off my last debt, and I have lived debt free ever since. But that does not mean I am living the frugal life. Before I paid off my debt I was paying almost $2,000 per month in interest alone! (That included my mortgage, which I also paid off.) Paying off that much debt freed up a bunch of cash each month. Since I have become debt free I have taken a two week first class vacation to Belize, and paid cash! I have bought a car, with cash, and I have enough in savings that I will be OK for a long time if I happen to lose my job.
Now normally this would be the place where I would tell you to buy my book, or sign up for my seminar, but that is not what I am going to do! Keep reading and I will tell you exactly what you need to do to pay off all your debt and become debt free.
Step Number 1- Find Out Exactly How Much You Owe On Your Credit Cards
Get all your credit card statements together, and then using either a spreadsheet, or just a piece of paper, across the top create the following categories.Credit Card Name, Total Amount Owed, Interest Rate, Minimum Payment. Now using your charge card statements fill out the worksheet for every credit card that you are carrying a balance on. Then add up the total amount owed, and the total minimum payment. Take a moment to just look at these numbers. Look at the minimum payment amount. What could you do with that amount of money if you didn’t have to send it to your credit cards? Now look at at the total amount due. Don’t worry about how big the number is, don’t feel guilty about running up that much debt. But do accept that this is the amount of debt you have, and that you are committed to getting rid of it.
Step 2 – What to Do When You Can’t Pay the Minimum Payments On Your Credit Card
Now go back to that minimum payment amount. If you regularly pay more than the minimum payment, I will get back to you in just a minute. But keep reading if you want to really accelerate paying off your charge cards. If you can’t pay more than your minimum payment, or if you are not able to pay even the minimum payments on your credit card. Listen UP! You are spending more than you earn. As long as you spend more than you earn, you will only get deeper and deeper in debt. And it will only get harder and harder to get it all paid off. Starting immediately you need to spend less, and make more. Personally I find spending less quite a bit easier than earning more. But I will be writing more hubs later that deal with both of these topics in more detail.
But for now, first look to where you can cut back on spending. You may think that you have cut back as much as you can, but I can almost bet you have not. Sometimes it takes drastic measures to make a real dent in your spending. Taking your lunch to work and passing on the daily latte will certainly help, but here are a couple ideas that will turbo charge your efforts to get your credit card debts paid off.
Consider selling your car and using public transportation. If you are making payments on your car, this might be all you need to get on the fast track for paying off your credit cards. Just make sure you can sell your car for enough to pay off the entire debt.
The second big step you can take to increase your income without taking another job is to consider taking in a roommate. In my area you can rent a room in your house for $500 per month. Once again, think about how quickly you could pay off your credit cards if you paid an extra $500 per month.
Step 3 – Paying Off Your Credit Cards, Have a Plan
Pull out your spreadsheet and take another look at your minimum payment. Now decide how much extra you can put towards paying off your credit card accounts.If you can’t come up with an extra amount, then go back and read the previous paragraphs. For the plan to work in a reasonable amount of time, you need to be able to pay more than the minimum payment. Decide which charge card you would like to pay off first. Some people like to pay off the card with the highest APR. That makes sense, because in the long run you will pay less in interest. Some people like to pay off the card with the lowest balance first. That way they will have the satisfaction of getting a card paid off in the quickest amount of time. Either way is fine with me, as long as you pick just one card that you want to pay off first, and stick with the decision.As you pay off each card, you will roll over the total payment into the next card you want to pay off.
For all of your credit cards except one, you are going to pay just the minimum payment…no more! This starting minimum payment is the payment you are going to make until the card is paid off. Over time, your minimum payment will go down, but the amount you pay on the card will not.
Now lets take a look at your extra payment amount. If it is under $12 take half of it and make that the additional payment on the card you are paying off first. That is right, I said half. Even if it is only $1. The other half of your extra payment amount you are to deposit in an emergency only savings account. Even if it is only $1. Now I know that most lenders will not open a savings account for only a dollar. Get creative, you don’t need to keep the cash at a credit card company, but you do need to put it aside to be used only for emergencies. And I mean real emergencies. You biggest priority right now is to pay off your debt. Your emergency fund is to be used only for things you literally can’t live without. If your extra payment amount is $12 or more, I want to you split it in thirds. One third to paying off your debt, one third to your emergency savings account, and one third to fun cash.
Step 4 – Automate Your Credit Card Payments
Now that you know exactly how much you will be paying on your credit cards each month, you can set up your payments so they happen automatically. Most banks will let you do this through online lendering, or you can contact your credit card account company and they will set you with an automatic payment plan. With all your payments on auto pilot, you won’t be late making a payment, and you won’t be tempted to skip a payment. You just need to be sure that you have enough in the bank to cover your payments.
Step 5 – Pay Cash for Everything
Let me tell you about a very difficult day in my life. I had committed to paying off my credit card account debt, and that meant not charging anything. How can you pay off your debt if you are continually adding to it? I was in the middle of putting in an above ground pool. It was May and the days were beginning to get warm. I couldn’t wait for my pool to be done so I could enjoy it. But on this particular day I realized that I needed some extra parts for the pool. I didn’t have the cash for it. I knew it could take weeks to save up the cash for the parts, weeks that I could be swimming in my new pool. I am happy to say that I stuck to my plan. I made an extra effort to cut costs, and I did various odd jobs that I could find to bring in more cash. In two weeks I had saved enough to buy what I needed to finish the pool, without adding to my credit card debt.
Paying cash for everything is the hardest part of the plan, and the most important. As the old saying goes, if you want to get out of the hole, quit digging! This was the most challenging part for me and for most people. But once you get in the habit of paying with cash or doing without, you wil find that it gets easier and easier. Plus you will be getting the satisfaction of watching your charge card account balances go down for a change.
The Final Step To Becoming Debt Free
Every once and again, most people will have a time when some extra cash comes into the house. It could be a tax refund, a raise a work, even an inheritance you didn’t know was coming. Whenever that happens, just apply the one third rule. One third goes to paying off debt, one third goes to emergency savings, and one third goes to fun cash.
A funny thing starts to happen as you learn to live on a cash basis, and as you watch your charge card account balances decline. You start to enjoy living within your means. You find that you are stressing less about money, and you might actually find yourself feeling sorry for the people with lots of expensive “stuff” that they bought with debt.
And when the day comes when you finally pay off that last credit card account, you will have a huge sense of satisfaction, knowing that you have done what many people attempt, but few actually do.
Also, if you are looking for a balance transfer credit card to bring interest down, www.1-2-3-creditcards.com has the best credit card offers. I would advise starting with Discover credit cards or Chase credit cards.