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Pay Off Your Debt for Good This Time

Cynthia Ramnarace

This is the Year


There is an enemy amongst us, my friends. Its name? Revolving Debt. You might know it by other names: Plastic fantastic, Charge! or “passport to debt slavery.” Whatever you call it, credit card debt has the power to take over your personal finances, holding you hostage and making it feel like it’s impossible to get ahead and truly achieve financial freedom.

But no longer: This is your year to make a plan to get rid of your debt for good. You will start chipping away at that balance, making sure it shrinks instead of stagnates, or worse, grows. Here’s how to start — and keep going until it’s gone.

Make a List


Grab a sheet of paper and a pencil. (Have a box of tissues or a glass of wine nearby, too, just in case.) Then take a deep breath and write down the name of each card, the balance, the annual percentage rate and how much you paid last month in interest charges. Then total the balance and interest columns.

“What really gets people is the total dollar amount of interest that is going to service their debt,” says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling. “Think, ‘What could I be doing with that amount of interest money if it weren’t servicing debt? Saving? Investing? Planning a vacation?’”

The list method works as a motivator because it lets you know what you’re dealing with and gives you a tangible reason — that sickening amount of money the banks are earning off of you — to create a payment plan and stick with it.

“Stare the debt in the face,” says credit card expert Beverly Harzog, author of “Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made.” “Acknowledge it. If you ignore it, it turns into a giant monster. When you acknowledge it, then you can have a plan of action.”

Plan Your Attack


There are generally two recommended methods for debt hacking: Attack the card with the highest interest rate first or aim for the card with the lowest balance first. Which method you should choose depends on what motivates you.

Targeting the card with the highest interest rate saves you the most money in the long run, says Harzog. “I suggest paying off the highest interest rate card because that’s where you’re spending the most in interest expense,” she says. “But I get a psychological lift from saving money.”

If your lift comes instead from seeing fast progress, aim at the card with the lowest balance, says Cunningham. The quicker you can start closing card accounts, the more jazzed you’ll get to keep scaling that mountain.

Lower Your Interest Rate


The interest you’re accruing on those balances makes it harder to pay off the total amount. So the less interest you pay, the quicker you’ll reach your goal. There are two ways to lower your rate: negotiate with your current lender or find a new one.

“If you have excellent credit, you can consolidate onto a 0-percent-interest credit card,” says Harzog. The transaction fees are usually 3 percent, she adds. But one card, Slate from Chase, has an offer that will waive the fee and give you a 15-month intro period.

If you opt for a card with a balance transfer fee, make sure that the charge will not exceed what you would have paid in interest if you had just kept the balance with the same bank and paid it off over time. For instance, if you have a $10,000 balance, you’ll pay a $300 balance transfer fee. If you have a one-year pay-off plan, you’ll pay a total of $10,300 by year’s end. If you opt against a transfer and your card has a 17 percent interest rate, you’ll pay $10,945 in total (adding in $945 in interest, according to the CreditCards.com payoff calculator). That’s substantially more than the $300 you’d pay in balance transfer fees. In that case, it makes sense to transfer the balance. But if your rate were much lower, say 3.9 percent, you’d only pay $213 in interest over the course of that year. In that case, it would make more sense to stay with your current bank. 

Negotiate With Your Lender


If you can’t transfer your balance to a lower-rate card, call your lender and ask if they will lower your rate. But only do this if you have a good credit score and no late payments.

“Call and say, ‘I’m thinking of transferring this balance to another card unless you can offer me a lower rate’,” says Harzog. “But don’t do this if you don’t have a good track record with this bank. It can backfire. I’ve seen people have their credit limits lowered after making such a call.”

You can also try to negotiate what you owe, but this has its downside. For example, you can call up and say that you’ll pay the company $8,000 if they’ll forgive your $10,000 balance, but what happens then is that the lender lists the loan as “paid by settlement.” And once those words hit your credit report, your rating suffers.

“Your future lender will see that you left the last guy hanging,” says Cunningham. “They might not be willing to do business with you.”

Figure Out Your Pay-off Plan


Sure you want to whittle away those balances. But where is the money going to come from? Your options: Either cut expenses or increase income.

To cut expenses, sit down and make a list of all your spending, from housing to auto to groceries and childcare. Some bills, such as a car payment, are static. But some line items, such as groceries and clothing, might have wiggle room for reduction, says Harzog. Can you use coupons at the grocery store? Shop second-hand for the kids’ clothes this season? Can you give up your gym membership and instead start running outdoors?

“Cut your budget down to the bone,” says Harzog. “And every bit of extra money you find, throw that at your credit card balances.”

You can also work on increasing your income. Maybe it’s time to ask for that raise or promotion at work, or to take on more hours or extra work. Harzog even recommends taking on a part-time job for a short period of time and using all those earnings toward debt payments.

Reward Yourself


Don’t strip all the fun out of your budget, says Harzog. “If you put yourself on a very strict budget and don’t allow yourself any fun, you will probably fail,” she says. “So every now and then, when you hit a milestone, give yourself a little splurge. Don’t go crazy: It has to fit in your budget.”

Figure out what your milestones will be and how you’ll reward yourself. Maybe you go to your favorite restaurant every time you hack 10 percent off your total, or you allow yourself to pick out a new lipstick from the department store counter. Then set your eyes on the next goal and the next prize.

Be Realistic


The average American adult has $4,878 in consumer debt, according to CreditCards.com. So if you have roughly $5,000 in debt, don’t tell yourself you’ll have that paid off in six months — unless you can realistically afford to pay $833 a month. If your budget only allows for you to pay half that amount, you’re better off taking longer to pay down the debt at a speed that’s manageable. Have you ever tried to lose 10 pounds in a month and given up halfway through when the scale didn’t move fast enough? If you’re too aggressive in your plan, you set yourself up for failure.

Set a Deadline


How fast you get there isn’t as important as getting there. But getting there matters — so set a deadline.

“Figure out at what point in the future, based on your calculations, that you can pay off your debt and start using or saving your money for something else,” says Matt Chevalier, senior vice president of retail for TD Bank. “It will give you something to look forward to and motivation to stay on track.”

It will also keep you disciplined, as you’ll know that any month you fall short of your payment goal will push the finish line that much farther away.

Don’t Take on New Debt


While paying down credit card debt, stop using your cards altogether. Taking on more debt while you trying to pay it off the old is like trying to bail water out of a sinking boat.

“You may have plans to buy a new car, go on vacation or make a big purchase in your future,” Chevalier says. “Debt can cause you to have to postpone or even cancel these plans.”

This can be disheartening but remember: Short-term sacrifice will lead to long-term freedom, as well as more cash to get to where you want to be without the worry about growing credit card balances.

Seek Help If You Need It


If you’ve tried without success to get out of debt, you might need someone to guide you. Seek out an approved credit counselor from the National Foundation for Credit Counseling. You’ll be asked to bring all your bills and a list of your living expenses. “We set up a monthly budget,” says Cunningham. “We contact creditors and negotiate lower monthly payments, lower interest rates and get late fees stopped.”

When it comes to debt management, there are a lot of scam artists out there. So before you sign up with just anyone, make sure they are affiliated with the NFCC, are accredited by a third party such as the Council on Accreditation and that the counselor is a Certified Consumer Credit Counselor. Also ask about fees. If an agency says that fees are voluntary, that’s a red flag. A legitimate agency will also agree to work with all creditors, will work with you regardless of the size of your debt and will offer a variety of debt relief options. For more information on how to find a legitimate debt counselor, visit NFCC.

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