Declare War On Credit Card Debt

"The best way to get out of credit card debt is not to get into it in the first place."  Sound familiar?  This is the advice I myself received time after time when I was looking for some comforting counsel.  Unfortunately, time travel was not an option, so I had to dig a little further.  After months of scouring the internet, calling credit-counseling services, and reading several books and articles on personal finance, I found a system I could rely on.  In fact, I found two good plans; I just had to pick the one that suited my needs and my personality.  I will describe these two plans in detail, but first I need to tell you that there are two key secrets to managing and eliminating credit card debt.  The first secret is this:

It ain't easy.

I apologize for my poor grammar, but I wanted to make that point emphatically clear.  You have to declare all-out war on credit card debt.  Take no prisoners.  Dedicate every decision you make, every action you take to the elimination of your debt.  It is critical to your financial health, and you must stay focused on that goal.  I will tell you the second secret after we cover our two plans of attack.

Plan 1 - Easy Targets

In this strategy, you outflank your enemy, in effect.  The first thing you need to do is to gather your most recent credit card statements.  Line them up in order from the one with the smallest outstanding balance to the one with the greatest outstanding balance.  This is your order of attack.  You are going to pay the minimums on each card, with the exception of that card with the lowest balance.  For that card, pay the minimum plus any amount you can scrounge up.  Before long, the card will be paid off.  That is one less monthly payment to worry about.  That is one battle won.  Unfortunately, the war is likely still raging.

At this point, you must focus on the next target, which is the card with the next lowest balance.  Apply everything you were paying toward the first card to the payments on the new target.  In other words, pay the minimum amount shown on the statement, plus the amount of the original minimum payment on the card you already paid off, plus whatever amount you can come up with and still eat and pay rent.

As you pay off these cards, continue the process.  You will see that you will be making some really large payments on the last card or two.  That is a good thing.  Do not let the light at the end of the tunnel distract you; you must fight until you achieve total victory.

This tactic provides a psychological advantage, because it will take less time for you to eliminate that first debt.  Beat the small guy first, and then move on to the heavier hitters.

Plan 2 - Frontal Attack

This is actually the plan I used.  The downside is that it takes longer to knock out your first target.  The upside is that, in most cases, the total amount of money paid is less.

The Frontal Attack is very similar to the Easy Targets plan.  In fact, there is but one difference.  When you line up your statements, put them in order from the highest interest rate to the lowest.  On most statements, the Annual Percentage Rate, or APR, is found near the bottom of the page.  In a Frontal Attack, you go after the big dogs first.  Again, you will pay the minimums on all the cards, save one.  The card with the highest APR is the one to which you will apply any extra cash you can come up with.  Just like with the Easy Targets plan, once one card is paid off, you must apply everything you were paying to the new target.

Whichever plan you choose, remember to scrutinize your monthly statements.  There was a time when the only things I looked at on my statements were my minimum payment amount and the due date.  Try looking at what your minimum payment amount is, and comparing that to the amount of the finance charges.  I had a card for which the minimum payment was $132, but the finance charges came to $131.20.  If I had paid only the minimum amount (which is what I did for some time), 80 cents is all that would have been applied to the principal.  I entered the balance, interest rate, and minimum payment amount into a credit card debt calculator from CNNMoney.com  to see how long it would take to pay off the balance.  The result came back, "Error: You chose to make minimum payments only.  The amount of your payments is not enough to pay off your credit card debts in at least 100 years.  Please adjust your entries."  Now that is an eye-opener.  If you are like me, you would rather not wait that long to be free of credit card debt.  Even paying just $10 over the minimum can make a world of difference.  As an experiment, I went back to that payment calculator and entered in $142 as the monthly payment amount.  The result was still a very scary 57 years to pay off the balance, but it had come down from over a hundred years!  I then put $152 in as the payment amount and I was able to reduce the time down to 37 years.  Ultimately, I decided to pay much more than that a month, which hurt really bad, but I saw progress every month.

As an example, I went back into the credit card debt calculator and entered a balance of $5000.  Here are some of the scenarios I found:

At a high 19.99% Annual Percentage Rate, paying one hundred dollars per month gets you debt free in "only" eight years and eight months.  Double those monthly payments to two hundred dollars, and that drops to two years and eight months!  A hundred bucks a month buys you six years in that case.  Not only that, it saves nearly $4000 in money that would have gone down the drain towards interest.  What could you do with that four grand?

As you can see, lowering the interest rate also buys you a lot of time and money.  It makes sense to lower the APR's on your cards whenever possible.  For more information on negotiating rates with credit card companies, see the "Magic Bullets" page.

Obviously, you must also stop using credit cards all together.  No excuses.  Cash is king.  When you use cash, you see and feel every purchase.  You are painfully aware of every dollar.  Even debit cards, though they are far better than credit cards, deny you that psychological advantage.

Finally, I will reveal the second key secret.  Much more important than which plan you pick, is picking a plan at all, and sticking with it.  Keep squarely focused on your goal of eradicating your credit card debt, and attack it with everything you have got.  Close your eyes and imagine how good it will feel when you are debt free, and there are no more monthly credit card statements coming in.  You can do this - go get it!