The best way to pay off credit card debt isn't drawing from your home equity or borrowing from your 401(k) savings. Rather than liquidating your personal assets to pay down debt, the Federal Trade Commission and other credit experts recommend you do it the old-fashioned way: form a budget and stick with it, limit card use and devise a repayment plan with the help of a certified credit counselor.
Restrict Card Use
Avoid adding more debt onto existing credit cards. Use cash to pay for most routine purchases to prevent buying unnecessary items. Make it difficult to access your credit cards. Doing so helps reduce your temptation to use them. For example, freeze your cards in ice or store them in a safety deposit box at your bank. Keep one card available for emergencies.
Form a Budget
Create a realistic budget. Track all your expenses for at least two months and subtract these expenses from your income. Reduce your variable costs by 10 percent and direct those savings toward paying down credit card debt. For example, take your lunch to work rather than eat out, carpool with a friend or co-worker to save on gas, shop at discount stores for food and clothing and subscribe to a DVD mail service for entertainment instead of going to the theater.
Choose a Method
Choose a method to pay down your credit cards. Select either the card with the highest interest rate or the card with the lowest balance to pay off first. Apply the savings gleaned from your new budget to pay down the selected card's balance. When the card has a zero balance, continue this method to pay down the next card. Pay the minimum balance on all your cards to avoid accumulation of late fees and other penalties.
Seek Outside Help
Consult a nonprofit credit and debt counseling agency to design a debt repayment plan for you if you cannot meet your minimum payments or need help negotiating with creditors. A certified counselor can assess your debt, determine what you can afford to pay and often can get creditors to waive late fees and stop future interest charges, giving you more time to pay off your debt. Find a reputable counselor through your local university, military base, housing authority, church or synagogue.
Manage Your Credit
Limit the number of credit cards you use. Set one card aside for financial emergencies. Rotate your other cards using them for small purchases only once or twice a year to keep them active. Avoid allowing fees to accumulate on your cards and resolve to pay off the balances each month. Doing so will help you avoid paying interest charges and keep you from falling back into debt.
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