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How to Get Rid of Credit Card Debt

Credit Card debt is something which is easy to get into but seems hard to get out. Although the path out is not easy it can be surprisingly simple.

The first and most important point about getting out of credit debt sounds obvious but it bears repeating, and that is don’t spend more than you earn. The cornerstone of any debt reduction strategy is cutting spending. While earning more money is useful, it is very easy to let the amount of money that is spent to quickly match that which is earned and the debts to still linger.

It may not be much fun to budget but it is necessary in any debt reduction program. Budgeting should not be daunting as it is simply the act of predicting what needs to be spent, recording what is actually spent and comparing the two. It is important not to be discouraged if these two figures do not at first show as large a debt repayment as was being hoped for, but keep going with the budget.

It is also important to be honest with people as to the goals of the debt reduction. If you have a husband or wife then they also need to agree that this is an important goal, as it is tempting but nearly impossible to reduce debt by being the only one in the couple to be reducing the debt while the other is still spending. It is also a good idea to be honest with members of the family who have leant money. They will be more understanding if they know what the general aim of the debt repayment is. It can also be a case that friends are more understanding about reluctance to go on nights out or holidays if they know that you need to cut down debt. Keeping up appearances can be very expensive.

One thing that should be done with credit cards is to avoid minimum payments on all cards. There may be a case for extra payments to be focussed on one card, but minimum payments are in fact very expensive. This is because of compound interest which is the interest paid on interest. Compound interest means that interest mounts up very fast and so $1,000 paid off on a 20% credit card debt now will be worth $2,073 in four years time and $3,583 in seven years. It’s been estimated that paying around 20% extra on the minimum payment can halve the period in which it takes to reduce the credit card debt in half.

There are two common methods of paying off debt faster, either to concentrate on paying off the highest interest rate first or to pay off the smallest debts first. Paying off the highest interest rate first is the quickest way of getting the credit card debt paid off, but paying off the smallest credit card debts is often seen as the best way of maintaining the momentum of debt repayment.

Concentrating on the highest interest rate is also known as “snowballing” as like a snowball rolling down the hill it gathers momentum. The logic of paying off the debts with the highest interest rates is that more of the debt repayment can be concentrated on paying off the capital amount of the debt if the average interest rate keeps on falling. This can also be helped by shuffling debt from a high interest account to an already opened low interest account. This however relies on a great deal of discipline.

The alternative is to concentrate on paying off the smallest debts first. This means that a borrower can get a real sense of progress when each debt gets reduced. As one of the problems of debt originally is a lack of discipline then having early milestones can greatly aid the process.