By Lee Sherman
Credit card debt can destroy your good credit rating. But not if you get rid of it first. With the right strategy you will increase your financial standing and this could even be an opportunity to get the rest of your financial house in order.
Be realistic. It doesn’t usually make sense to think you’re going to be able to pay all of it at once. Going that route can put you even further behind. Instead, consider working out a payment plan with creditors and be prepared to negotiate with them to get the most favorable rates. While you should keep financial goals in mind always, this is a marathon not a sprint and it’s best to take a long-term view.
Don’t be afraid to approach creditors. While it can be scary to admit you’ve dug yourself into something of a hole, your creditors will appreciate that you’ve been proactive in contacting them and are serious about paying them back.
Debt reduction strategies
There are two basic ways to eliminate debt. The first is to never get into debt in the first place. It sounds obvious but most people will pay off the monthly minimum payment each month that is required by the credit card issuer (generally 2% to 3% of the balance). While timely payments are important in establishing good credit, this approach will only find you even further in debt because the amount is conservative and you are also required to pay interest each pay period. Instead, and if you can swing it, consider paying down the entire amount of your credit card balance each month.
Like losing weight or building muscle mass, maintaining credit is a motivational discipline. The better you feel about your financial situation, the more diligent you’ll be about paying off your debt. The debt snowball. The snowball method takes that motivation into account. You pay off your loans, starting with he smallest balance, while continuing to pay the minimum balance on the larger debts. Once that’s done, move on to the next larger debt, and so on. Or try the debt avalanche method, which will get you where you want to be faster, paying off the largest balances first (this can be psychologically satisfying). Lastly, automating your payments is a way to avoid late fees. No one should ever pay late fees.
Debt consolidation is a bit like refinancing your home. You transfer all of your outstanding debt into a single account and then make an effort to pay down that account. Get a 0% balance credit card (many offer long introductory periods of as much as 18 months) you won’t pay interest and you’ll make just one payment a month which is easier to manage.
Taking out a personal loan is an option if you’ve got good credit already. While this has the potential to increase your overall debt, personal loans have lower interest rates than credit cards so you should save money in the long run.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.