Cutting up all of your credit cards and eliminating all of your debt is a pleasant thought, but is not reasonable for most saddled with debt. Indeed, credit card debt can be extremely troubling, as it drains your cash flow with monthly payments, as well as incurring substantial interest fees.
While you likely have alternative options, it is often best to take them head on. They can, however, be approached in a simplistic and effective manner.
Isolating and Attacking Credit Cards
The idea behind this strategy is simple. Imagine you are in a considerable amount of debt, and you have four or five credit card balances to pay off. Spreading out the payments in terms of what you’re comfortable with paying isn’t the best way to go about it. It will be difficult to make progress without the focus that we are going to use here.
Isolating an individual credit card has one objective in mind: eliminating credit cards, one by one. Your finances will be alleviated easier when you can concentrate on one balance at a time. If you are stuck with making minimum payments for everything, it will be a long, hard road out of debt.
Step 1: Identify Your Target
Take a look at your credit cards. You will need to figure out which card to single out first. Unless you have some very special circumstances (i.e. a credit card has a great money-back program), this will likely fall into two categories:
- Highest Interest Rate – The logic here is simple: if you continue to make the minimum payments, this credit card is the one where you will lose out on the most money. However, it could be overridden by the next point.
- Highest Balance – If a credit card is 10 times the balance of the one with the highest interest rate, it may make more sense to attack this one instead. This also has the advantage for your budget; you will have greater flexibility once the high minimum payments (your expenses) are lowered for the credit card.
If you have a credit card that fits both well, this is an easy decision. It could be a close call, however; you could consider other factors, such as choosing the credit card that will be paid off sooner.
Step Two: Allocating the Money
For your other credit cards, you will simply pay the minimum amount required. The real work comes in when you decide how much money to put towards the isolated target.
This can only be done by looking at your budget. Within your overall financial strategy, you will need to decide upon a figure for your credit card debt. Here are some steps to help you come up with a number:
- Based on your income and expenses, allocate a budget amount to your credit card debt
- Subtract the minimum payment amounts on all of your credit cards, minus the isolated credit card that you are targeting
- If there is any money left, this is the amount that you should consider allocating to the isolated credit card
Let’s take an example: say that you have $12,000 in credit card debt, where the minimum balances total around $250. If you can afford to pay $325 each month, the extra $75 would go towards the isolated credit card that you have chosen.
Step Three: Stay Consistent and Repeat
While the numbers may not go down drastically overnight, it will work if you keep going. If you’d like to see how much of a difference paying over the minimum amount can make, play around with credit card calculators that can demonstrate this for you.
As the targeted credit card balance decreases, eventually you will be able to pay it off, if all goes well. Try to stay consistent with this aspect of your budget.
After this is accomplished, you can eliminate the credit card and repeat the process. In time, hopefully sooner than later, your credit card debt won’t be such a strain on your finances. Perhaps you can even increase your budget for your debt repayments, in order to attack credit card debts more forcefully.
This strategy can be a smart decision when it comes to credit cards. Ideally it will save you in terms of interest costs and the high minimum payment balances that undermine one’s finances.Image credit: Dan Esparza