Plan to Pay Off Credit Cards and Other Debt
I’m always amazed at how many people are willing to pay 25-30% interest on their credit cards. I suppose the reason is it is too easy to pull out that little piece of plastic to buy the things we want and not even think about how much it is costing. How you got into credit card trouble is another topic (See our “How To Control Spending” post). I want to discuss how you devise a plan to pay off credit card debt. It starts by stopping the use of the credit card. Next, follow these steps:
- List each credit card you have in a spreadsheet or on paper with the following information: Card Company, Current Balance, Minimum Payment Amount, Interest Rate
- Sort the list in order from highest interest rate on top to lowest interest rate on bottom
- Total the minimum payments
- Determine how much you can afford to pay totally on all the credit cards
- Subtract the amount in #3 from #4. The result is the amount you add to the minimum payment of the first card in your list in #2 above. You pay that amount each month until that card is paid off.
- Once you pay off the highest interest rate card, you take the amount you were paying on the card you just paid off, and add it to the payment you were making on the new highest interest rate card on your list. You pay that amount each month until that card is paid off.
- Repeat step #6 until all card balances are paid off.
There are always situations where you have to use a credit card (hotel or airline reservations, etc.), but never use a credit card for any reason if you don’t have the money today to make that purchase. Otherwise, you are spending money you don’t have. In other words, you are going into debt. Many people will buy something with their credit card and try to figure out how they can pay for it later. That is how credit card balances build up.