Climbing Out of Debt in 2013
Credit card bills will soon arrive and show how much households spent during the holidays. Chances are good that many consumers added a few hundred dollars of debt to their credit card accounts which already averaged nearly $5,000 per cardholder.
As we begin a new year, it is important to have a detailed plan on how to pay down credit card debt as quickly as possible and reduce the amount of interest you could pay. Here are 10 tips for paying down debt in 2013:
- Know how much you owe. Collect each of your bills with outstanding debts, including all credit cards, mortgage, student loans, auto loans, personal loans and bank loans. Create a list of all the creditors with the monthly payment amount, balance, interest rate and credit limit for each. Verify the payment due dates and the status of the account.
- If you carry a balance on your credit card from one month to the next, stop paying for purchases and daily expenses with that card. You will pay a high interest penalty on every purchase you make. If you charge meals, entertainment or clothing on your credit card, you could still be paying these off years later, long after the purchases are forgotten. Put away the credit cards and use cash for purchases. Cash is the most immediate, painful form of payment and it will make you think twice about each purchase.
- Call and ask for lower interest rates. Credit card issuers don’t act on this as often as they used to, but it doesn’t hurt to ask. If you have received an offer for a card with a lower rate, ask your issuer to match it. Tell them you will be shopping around for another card if they don’t lower your rate. If you are a good customer, they may be willing to work with you to keep your business. If your rate is lowered, add the amount you saved to your payment so you can pay your balance down faster.
- Pay more than the minimum amount every month. Minimum payments are set at one to five percent of your monthly balance. While it makes your monthly payment smaller, it takes a long time to pay it off and you will pay much more in interest. Your credit card bill is now required to show exactly how long it will take to pay off your balance if you just pay the minimum amount each month.
- Focus on one card. Paying off multiple credit cards with high balances may seem overwhelming. Pick one card and focus on paying off that card. Start with the card with the highest APR and pay as much as you can over the minimum amount to start bringing down your balance. When you pay off the balance on that card, direct your efforts to the card with the next highest interest rate.
- Consider transferring your balance to a card with a lower interest rate. If your rate is above 15 percent, it could pay to transfer the balance on that card to one that offers 0 percent APR for at least 12 months. Citi Simplicity currently offers a 0 percent rate for 18 months. To take full advantage of this 0 percent interest, pay as much as you can above the monthly minimum while you aren’t paying interest. Make every payment on time or you will lose the introductory rate. Only use this card for the balance transfer, not additional purchases because interest may be charged on purchases. Most cards charge a 3 percent fee for balance transfers so you need to calculate if the interest you save in making this transfer is greater than the fee. This fee is also rolled into your balance. Chase Slate gives a 0 percent introductory rate on purchases and balance transfers for 15 months. There is no balance transfer fee if you transfer a balance within the first 60 days of your account opening.
- Make micropayments instead of one monthly payment. As long as you pay the minimum payment by the due date, you can make multiple payments during the billing period. This is a more active way of taking charge of your credit card payments and can help pay your balance faster. Credit card issuers typically charge interest on a daily basis, so reducing your average daily balance can save you a few dollars in interest. Eat a meal at home and immediately apply the money you saved to your credit card balance. If you receive gift money or make a little extra cash, immediately apply that money to your credit card balance.
- Obtain a free copy of your credit report and review it for errors. Inaccuracies could pull down your credit score and cause higher interest rates on your loans. Correct the errors and contact your creditors to notify them about your improved score and ask for a lower rate. You can receive one free credit report each year from the three major credit reporting agencies. Obtain these reports at AnnualCreditReport.com.
- Prioritize which bills to pay first. If you can’t pay off all your monthly bills, the first priority is to pay the bills that are a necessity for health, shelter, basic groceries and basic transportation. Then pay the secured loans such as your car loan. Payments on unsecured loans, such as most credit cards, should come last in these critical situations.
- If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be willing to work out a payment plan, lower your rate or decrease your monthly payment. Explain that you are in debt, the steps you are taking to repay it and what you can pay today. If you request a lower interest rate and get turned down, politely ask to speak to the supervisor and ask again. Document all conversations, including whom you spoke with, the date, time and the results. If your debt problems are more than you can handle, contact the National Foundation for Credit Counselors to get a debt repayment plan.