How Does Reducing Credit Card Debt Work?

Although reducing your outstanding credit card debt seems as simple as making your minimum monthly payments, you will likely find that this approach is not helping you make progress. If you want to get serious about reducing your debt, a rigorous budget and strategic payments are the most effective tools.

Earn More & Spend Less

Reducing outstanding credit card debt begins with ceasing to use your credit cards and having additional cash on hand to send to your card issuers. This requires a complete plan to eliminate unnecessary expenses and even generating additional income through freelancing or getting a second job. As far as reducing expenses, immediately switch to a cash budget---if you do not have the funds in your account to make the purchase, simply do not buy the item. Explore ways you can save money on your electric, cell phone, television and insurance bills.

Obtain Lower Rates

Since credit cards are unsecured debt, they carry significantly higher interest rates than secured loans, such as automobile loans or home mortgages. Additionally, the already high credit card rates skyrocket to what is called the penalty rate---which can be 39 percent or higher---when you are late on payments or you go over your credit limit. At these exorbitant rates, it is nearly impossible to pay down your debt, particularly if you are only sending in the minimum payment. Contact your creditor to ask about lowering your rate, transfer balances on higher rate cards to cards carrying a lower rate and available credit or even enlist the aid of a credit counseling agency.

Send in Money Promptly & Frequently

Even if you are unable to get your rates lowered, start sending in payments to your credit cards as soon as you have the cash available and do so frequently. If you find yourself getting a raise at work, take 100 percent of your additional take home pay and automatically send it into your credit card issuer. Every time you make or save money, take the extra money and immediately pay your issuer. The faster you send payments in---even if small payments---the faster your average daily balance will be reduced. Additionally, if you have funds in a savings account, use most if not all of those monies, to pay down your debt. It is unlikely that your savings account is paying you a higher rate than what the card issuers are charging.

Rollover Payments to the Next Account

By sending in all additional funds available to your card to the highest rate account, you will quickly pay down the balance on that account. Once that first account is paid off, identify the next account with highest rate, pay down the balance with the entire amount you were paying each month to the other account plus the minimum you were already paying. By paying off accounts with the higher rates first, you will maximize savings on interest fees. Often, people wish to pay down the account with the lower balances first. This approach can also work, but if you are paying down balances with lower rates first, you will be accumulating interest charges you could have avoided by paying down higher rate accounts.