Assessing Debt

There are two popular ways to reduce debt:

• Pay off the highest interest rate debt first; or
• Pay off small debt balances first and close accounts.

Before either one of these payoff options can be utilized, organize your debts on paper. Set up a spreadsheet that lists the interest rate, balance owed, company, and the minimum monthly payment for each debt.

Then begin to get yourself out of debt without incurring any additional charges. For example by paying even a slightly greater amount than the minimum required could save a great deal of money.

Credit card companies generally ask for between 2 to 4% of the balance to be paid monthly. By simply doubling the minimum payment, the interest paid and time to pay off the credit card is significantly reduced (assuming no new charges are incurred).

Consider sending in additional payments, if possible, during the month.

Carrying a Credit Card Balance

Paying off a credit card balance over time could take much longer than one realizes. Often one is unaware just how long it takes to pay off an initial charge because more debt is continually added to the card.

For example, it would take over 11 years to pay off a $1,000 balance on a credit card charging 22% interest, assuming that only 2% of the beginning balance is paid per month.

How Credit Card Payments Are Credited

The cardholder agreement outlines how payments are applied to an account. Many credit card companies apply payments to the lowest rate balance. Thus cash advance balances, which generally have higher interest rates, remain outstanding until the balance for the other purchases is paid off.

Lowering Credit Card Rates

Telephone each credit card company where you maintain an account and ask them to lower your interest rate. In order to do this, you generally must have good credit. In addition, you may need some leverage on the interest rates financial institutions are currently offering. Keep in mind, it is generally difficult to get department stores to lower the interest rates on their signature cards.

Important Credit Lessons

• Use credit only when money is available to pay off the charges immediately.
• Keep track of all purchases made on credit.
• Pay off balances on a monthly basis.
• If the balance cannot be paid off monthly, avoid using the credit card until it is paid off.