Dear Carrie: Please help. I'm determined to get out from under my credit card debt this year, but don't know how to get started. I'm currently earning $50,000 a year as an administrative assistant, but I owe $20,000 on my three cards. I'm afraid I'll never get on top of it! --A Reader
Dear Reader: Just by asking for some advice, you've taken a vital first step towards getting on top of your credit card debt -- so congratulations for taking control. I won't sugarcoat your challenge: This won't be easy, and it will almost certainly take you longer than a year. You'll need your determination and some discipline. So let's get to work.
FIRST: STOP USING YOUR CARDS
At the risk of sounding obvious: Stop using your cards, and use cash or checks instead. Not only will this slow down the growth of your debt, it should help curb your spending in general. Most people find they spend less if they pay by cash or check. (I don't recommend getting rid of your credit cards entirely; in today's world, you need at least one or two. Just use them out of necessity, not convenience.)
SECOND: MAKE A BUDGET
Next, figure out how much you can devote to paying down your existing balances each month. Start by creating a realistic budget. You might put expenses into two broad categories: your basic fixed costs, including rent or mortgage payments, car payments, utilities and groceries, and discretionary expenses, such as eating out, travel, clothes and entertainment. If you want to get really serious about reducing your debt, you might try to change your fixed expenses (move to a cheaper living situation, for example), but probably most of your free cash will come from reducing discretionary spending.
THIRD: DON'T FORGO SAVINGS
Your budget should also include savings. I know your priority is to reduce debt -- as it should be. But make savings a part of your budget now, even while you still carry balances on your cards. Having money in the bank is invaluable for emergencies and is psychologically reassuring.
I'd set two savings goals for now: an emergency fund of three to six months' worth of expenses in case something truly horrible happens, like you can't work for a few months and some retirement investing, preferably through an automatic payroll deduction into a tax-advantaged 401(k) plan. This should be at least enough to capture an employer match.
FOURTH: DECIDE WHICH CARDS TO PAY OFF FIRST
It makes sense to pay off the highest rate cards first, obviously, so make sure you understand the terms for each of your cards. You might also see if it's possible to consolidate one or more balances onto another lower rate card. Card companies routinely offer the chance to transfer balances, sometimes with very low teaser rates, which could result in real savings in terms of your total interest expense and could also accelerate your progress in becoming debt free. (If you do a balance transfer, take note of any fees that might be imposed.)
FIFTH: COMMIT TO A PAYOFF SCHEDULE
Now you can start to pay off your card debt in earnest -- and efficiently. Say you had $600 a month for paying credit card debt. Pay the minimum payments for the two lower-rate cards and apply the rest to the highest-rate card. When that one's paid off, move to the next highest rate card. Here's a link to one of several online calculators that will tell you how many months it will take to pay down your debts: http://bit.ly/wZk1zj. I'm sure you know this, but it's so important I feel compelled to mention it: Make sure you always pay at least the minimum and never be late. Credit card companies can impose substantial fees on late payments, and you could damage your credit rating.
Getting out of credit card debt is one of the more daunting financial challenges, and some people understandably feel overwhelmed. You said you were "determined" to deal with this, and that's exactly the kind of attitude you'll need to get to the position of being debt-free. Good luck!
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at email@example.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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