Good Advice on Credit Card Debt

Paying off your debt is a lot like planning a road trip; you need to understand where you're starting from and what tools you have, then choose a route and stick to it. Since the amount of debt you have makes up roughly one third of your credit score, paying down your debt is vital to maintaining good credit. Doing so frees up your finances for the things that you enjoy, rather than being allocated to making payments on interest.

Budgeting

You must create a budget before you attack your credit card debt. If you don't know how much you have to contribute to your debt each month, there's no way you will be able to create an effective plan. Start by logging everything you buy over the course of a week, then multiply the total by 4.3 to get an estimate of what you spend each month. Add that to your recurring monthly expenses including your utilities, cell phone and rent or mortgage to understand how much you're spending each month, then compare that figure with your take home pay. Look at where you might cut back to contribute more to your debt, then add that to the amount you budget to pay off your debt.

Managing Interest Rates

Paying your credit cards at high interest rates means that it will take longer to completely pay off the balances. Getting a lower interest rate is possible if you call your creditor and ask for one. To prepare for this call, collect offers you've received in the mail for new credit cards with lower interest rates. This will give you an idea of what rate you're aiming for. If the representative at your credit card company refuses to lower your interest rate, try again on subsequent days until you are successful.

Method: Highest Interest Rate

Financial experts are divided when it comes to the best method for paying off your credit card debt. Many recommend paying off the card with the highest interest rate first so that you pay as little as possible toward those rates. This method saves you money in the long run, but it may take time to see the effects of your payments if the card has a high balance.

Method: Debt Snowball Plan

Other financial experts, like Dave Ramsey, recommend using the debt snowball plan. With this plan, you pay off the credit card with the lowest balance first. The theory is that you will see the effects of your increased payments quickly as the balance on that small account dwindles, which will encourage you up to pay off the credit card with the next highest balance.