While you may find yourself with a noose of debt that grows tighter each day, you can cut that noose once and for all by executing a solid financial plan. This plan should guide you in how to eliminate your debt and maintain your good credit. You can do both and still use credit cards if you follow a solid plan.
Credit Card Rollover
You can use your credit cards to transfer balances and reduce your debt, but do so with care. Rolling over credit card debt consists of transferring a balance from one credit card to another with a lower rate. This saves you money in finance charges. Be aware that you are just moving debt around, not eliminating it. Also, you are freeing up a credit line on the paid-off card, and leaving yourself open for overspending. Many lower interest rates are also temporary, so try to have the balances paid off before the interest rate changes.
Debt Snowballs and Avalanches
The debt snowball is a debt payoff method where you list your debts from smallest to largest and pay off the smallest bills first. You do the same with the debt avalanche, only you list your debts from the highest interest rates to the lowest, paying the highest rate accounts first. Use anything extra that you can find or earn to pay the first debt on the list. Whichever method you use is personal preference. Technically, you save money and get out of debt sooner with the avalanche, but many people are successful with the snowball because they get quick, short-term victories by paying off the small debt.
Toxic or Neutral Debt
Some also advocate organizing your debt into different categories, toxic and neutral. Toxic debt is high interest rate credit cards and other costly debt, such as payday loans. Neutral debt is car loans and other debt with more normal interest rates, usually with a more definitive payoff time frame. Toxic debt should be targeted first because of its potential negative impact on your personal finances.
Maintaining Credit
As you pay off your debts, do your best to maintain or improve your credit. You may want to modify your financial debt elimination plan to prioritize credit cards that are near or over their limit. A large portion of your credit score is based on how much of your available credit you use, and doing this will improve your credit. Also, as you pay off one revolving credit account, you may not want to close it, particularly if it is one of your older accounts. This will keep a long credit history, and keep your available credit higher. However, if you cannot stop using the account, you may be better off closing it rather than risk increasing debt.
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