Get Rid of Credit Card Debt: Tips for an Impending Recession

There has never been a better time to pay off your credit card debt. Credit card interest rates are skyrocketing with the impending recession. Recessions mean job loss, and the credit card issuing banks fear upcoming loss of payments. Not only are credit card interest rates getting higher, but in the event you lose your job, you don't want to be stuck with more credit card bills than you need.

Consider that if you have a $2,000 balance, adding nothing new to the card and paying minimum monthly payments of 3% at a 20% interest rate, you're looking at 183 payments, over 15 years, totaling $2,241! Wouldn't that $241 be more useful elsewhere?

According to this article on MSN Money Central:

23.8% of American households have no credit cards at all -- no bank cards, no retail cards, nothing.
Another 31.2% of the households the Fed surveyed paid off their most recent credit card bills in full.
So together, the households that owed nothing on credit cards equaled 55% of the total.

Of the households that did carry a balance, the median amount owed was $1,900.

Only 29% of households owe $1,000 or more on their cards.
21% owe $2,000 or more.
6% owe $8,000 or more.
4% owe $10,500 or more.
1% owe $21,400 or more.

Getting rid of credit card debt takes determination and willpower. It's easy to pay the minimum payments for years on end, but it's not the smartest thing to do.

Here's how to get rid of that lingering credit card debt.

Step 1: Create a budget. It's not as terrible as it sounds. Be prepared to be shocked at how much you spend. Get your credit card and bank statements together and look at how much you're spending, and on what. $5 here and $10 there really adds up. Create a budget with the realization that the money coming in should always exceed the money going out. If the outgoing money is more than the incoming money, you've got serious troubles. Determine a reasonable amount to spend monthly for food, gas, rent/mortgage, utilities, toiletries, rare and cheap entertainment, etc. If you're finding this too difficult on your own, you can always pay or find a charity personal finance manager to help you.

TIP: Eliminate entertainment expenses and frivolous purchases. Did you have to see that movie in the theatre last week? Did you really need that new lampshade? Shopping for nonessentials and going out should be the smallest portion of your budget.

TIP: If you're trying to "keep up with the Jonses", stop. Examine your priorities and determine if you'd rather be able to support yourself financially or buy that latest gadget or decorative item. If the answer is "buy", go ahead and give up the idea of financial freedom.

Step 2: Perform plastic surgery. Not the expensive kind, but the cheap kind. Take a pair of scissors and hack up those cards you really want to be rid of. If you can't bring yourself to do that just yet, hide them somewhere at home so you can't use them at stores for impulse purchases. You may need to have a trusted friend or relative hold on to them for you for accountability, so that if you want to "borrow" them you'd better have a good excuse.

Also, stop using your debit card. Use cash from the ATM instead for things like gas, food and your allotted spending budget. Consumers are much more likely to spend more when it's on "plastic", because psychologically it doesn't pack as big of a punch. Choose between throwing away a $20 bill and a credit card. You'd keep the twenty. You'll get the reality check at the grocery store, when handing over $4 in cash for a 12-pack of individually canned soft drinks versus $1 for a 2-liter of the same product.

Step 3: Make your debt payment plan. Sit down with your credit card statements and figure out how much you have on each credit card and what the interest rate is. Start with the card with the highest rate. From your budget, you can determine how much you have each month to spend on debt repayment. Pay the minimum monthly payment on the other cards and put as much money as you can towards the card with the highest interest rate. When it's completely paid down, take that money and apply it toward the second-highest card, and so on, until all the balances are gone. If you can genuinely make a budget and stick to it, you can determine ahead of time when you'll be debt-free.

If you have a credit card with a small balance that isn't your highest-rate card, go ahead and pay it off first. Then you'll know the exhilaration of not owing money, which will give you incentive for the bigger ones. Just take care not to create a new balance!

TIP: If you're having a hard time paying in big chunks, pay weekly. Your credit card company will accept money any time you want to send it. Instead of paying $100 a month, try $25 a week. That will also save you a little in credit interest costs.

TIP: Live well under your means. Ideally, you should be able to save and invest 1/3 of your income if you want to. Are you able to do this now? Use an online retirement calculator to determine how much you should be saving in order to be able to retire.

Step 4: Open your credit card bills and laugh at the zero balance. Now what are you going to do with all this money? Buy yourself a little prize, (using cash!), and then it's time to save and invest.

Once you've become financially responsible and can really stick to your budget, use your credit cards for budgeted items and pay them back monthly in full. Not using credit cards at all can damper your credit score. However, take care not to run the credit cards up again! You want to be debt free and stay that way.

Here's another helpful tip: Type or write this affirmation on some index cards or pieces of paper and tuck them in your checkbook, pocketbook, or wallet: "I always pay my credit card bills in full and on time!" Seeing that here and there will implant the subliminal message that you do not have to overspend. It's also helpful to write meaningful positive notes such as "I am debt free!" or "I am a wise spender!" and tape them on your credit cards, debit cards and checkbooks. That will earn you some strange looks and smiles from store clerks, but it will be a consistent friendly reminder to yourself that you are free of credit card debt - and you're going to stay that way!

Source:
http://moneycentral.msn.com/content/Banking/creditcardsmarts/P150744.asp