10
steps to debt freedom
- Figure out how much you owe.
Gather all your credit card statements and make a list that includes
the interest rates, total amounts you owe and minimum monthly
payments. List the cards by the interest rates they charge with the
highest rate first and so on. "A lot of people have lost track of
what they owe," says Gerri Detweiler, author of "The
Ultimate Credit Handbook."
- Keep the two cards with the lowest
rates. Cut up the others. Write to the card issuers and close the
accounts. (One caveat: Check the terms of use before you cancel. Some
credit issuers charge higher interest rates on the remaining balance
due to people who close their accounts. If this is the case on one of
your cards, pay it off and then cancel.)
- If you don't have a card with an
interest rate of less than 14%, get one.
- Resolve that you will use your
cards only for essentials over the next six months. For other
purchases, use cash or a debit card.
- Add up your minimum monthly
payments. Credit cards often require very low minimums. Follow
them and you will be paying forever. For instance, if you owe $1,000
on a card with a 17% interest rate, experts say it might take you 12
years and cost you $979 (in addition to the principal) to pay it off
if you make only the minimum payments.
- Calculate how much you can pay over
the minimum. Really stretch your budget. For instance, let's
suppose the minimum payments on your credit cards total $350 a month.
What could you pay if you really stretched? How about $750? No pain,
no gain.
- Apply all of your additional
repayments to the card with the highest rate. If two cards have
the same rate, put the additional money on the card with the largest
balance.
- Consolidate your debt. Many
credit card issuers offer introductory rates as low as 3.9% for six
months. If you're really serious about getting out of debt in a hurry,
transfer your largest, high-rate balances to a card with an extremely
low rate and pay them down aggressively.
- Pay the minimum on your lowest rate
cards until you've paid off the balance on the more expensive cards.
- Consider using your savings to get
out of debt. Sure it sounds harsh. But if you put together a
balance sheet, your debt would cancel out your savings anyway. If
they're in the bank, you're probably earning just over 3.2% to carry
debt at 18% or more.
Once you've paid off the balances, you've
got to be serious about staying debt-free. If you lack self-discipline,
consider using a debit card. Otherwise, pay as you go -- the entire
balance on each card when it comes in.
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