Get out of debt

Source: piggybankblues

When you have piles of credit card bills that are yet to be paid, you definitely need some kind of plan to pay off all these cards eventually. Although it may seem easy, making the minimum payment on all your credit card bills is not the best way. If that is how you’re paying off your debt you will probably be stuck with the same bills for years! Therefore, you need a plan to tackle each one of your debts one by one.

The easiest way to tackle your debt is through the snowball effect. This means that you give the credit card with the lowest balance the highest priority. This doesn’t mean that you forget the other cards. You must continue to be committed to pay the minimum amounts on all your credit cards.

Eliminating Credit Cards One By One

Although people might argue that it is best to pay off the card with the highest interest rates first, this does not keep people motivated as it doesn’t seem that their debt is being eliminated. Let us look at an example. A person has the following credit card debts:

Credit Card A: $300 balance; minimum payment – $25
Credit Card B: $750 balance; minimum payment – $30
Credit Card C: $1250 balance; minimum payment – $45

Regardless of what the interest rates are on each individual credit card, devote the rest of that surplus towards paying the balance on Credit Card A. Let us say this individual devotes $200 a month towards making credit card payments. After making the minimum payments on all cards ($25 + $30 + $45 = $100) he or she has $100 left. (Let us neglect interest charges for purposes of showing how the snowball method works). The remaining $100 (or surplus) will go into paying the credit card with the lowest balance (Credit Card A).

So after the first month the credit card balances are as follows:
Credit Card A: $175
Credit Card B: $720
Credit Card C: $1205

Again, repeat the procedure trying to eliminate the card with the lowest balance for the next month
Credit Card A: $50
Credit Card B: $690
Credit Card C: $1160

And for the next month, since there is only $50 left for Credit Card A, more of your allowed spending on paying off debt will go towards paying off Credit Card B:
Credit Card A: $0
Credit Card B: $585
Credit Card C: $1115

Through this method, this person was able to completely eliminate Credit Card A after three months of payments, and now they only have to concentrate on paying off two credit card bills. The psychological factor here is important. If you have less bills coming in, you feel that you have made progress, and there is now less stress in your head.

Source: Debt Counseling Care

Devote a Fraction of Your Income

Set aside a reasonable amount of your income every month strictly devoted towards making credit card payments if you are in debt. Track your spending and make sure you are not splurging on unnecessary items. Some people believe that by paying off only the minimum amount and leaving most of your income in a savings account will benefit because of the interest gained due to savings. However, the interest rates on the credit card debts are much higher than the interest rates you gain in savings. Therefore, that idea is flawed.

Make sure you make all minimum payments otherwise this will only hurt you in the end! And the remaining amount of what you left aside for credit card debt should be put towards the card with the lowest balance. Hopefully everyone will begin to budget their spending and track their expenses so as to not get into any further debt. Debt is a major problem here in New Zealand and the rest of the developed world, and a significant portion of this debt is due to the general public.

Are any of you in a large amount of debt? If so, do you have a general plan of attack as to how you pay off your bills? Or do you just concentrate on making the minimum payments on all your debts? Does your plan consist of the snowball effect or do you try to pay off credit cards with higher interest rates first?