Pay Off Credit Card Debt in 6 Steps

By Debbie Dragon   

Even with recent credit card reform legislation that will put an end to some of the most extreme industry practices, it's wise to reduce or eliminate credit card debt as quickly as possible, especially since new credit card laws don't affect the interest rates that card issuers can charge. There are several options available to those who want to pay off credit card debt, from using a debt management company to debt consolidation or home equity loans, to transferring high-interest debt with 0%-balance-transfer offers. Still, there are certain risks and expenses associated with all these approaches, so if you'd like to take a do-it-yourself approach to getting rid of credit card debt, follow these 6 credit card debt tips.

1. Save $1,000 to $2,000 in an emergency fund.
   
   It may seem counter-intuitive to save money when trying to pay off credit cards, but  doing so can be a very helpful first step. The problem many people run into when trying to pay off their debts is that they don't have any cash reserves when an unexpected expense or emergency affects them. People tend to swipe a credit card — which just keeps adding to their debt and makes it impossible to pay it off. Start your journey to becoming credit card debt-free by saving between $1,000 and $2,000 in an interest-earning savings account. Then, if something comes up while paying off your credit cards, you can draw upon your savings instead of resorting to using your credit card again.
   
2. Get an accurate look at your full financial picture.
   
   Make a list of all of your debts and monthly payment obligations. List all bills, the amount you pay each month (minimum payments), the total balance owed, and their interest rates. Then compare this list to your average monthly income so you can make sure your income covers all your expenses.
   
3. Reduce unnecessary expenses.
   
   While you're working to pay off credit card debt, you'll want to eliminate as many unnecessary expenses as possible to free up more money to apply toward your debt. See if you can reduce or eliminate spending on cable television, Internet connectivity, telephone and cell phone bills, groceries and household utilities. Relatively minor lifestyle adjustments will make it possible to reduce your costs, free up more money to pay down your credit card debt each month, and help you get out of debt faster.
   
4. Stop using credit cards.
   
   You can't expect to get rid of credit card debt if you continue to use your cards, even if only for "small" purchases or a one-time expense. You must stop using credit cards to pay them off in full. Since closing your credit card accounts can hurt your credit score (because it lowers your ratio of debt to available credit), only close them if you can find no other way to avoid using them. If you can resist temptation, freeze them in a cup of water so you'll have to wait for your ice-encased credit cards to melt before grabbing and using them, or simply store them away in your home or a bank safe-deposit box.
   
5. Using your list from Step #2, make another list of just your credit card accounts.
   
   Put the highest-interest debt at the top of the list, then the next-highest, and so on. Looking at your complete list of expenses, you'll know exactly how much money you have left over after paying all of your bills and sending the minimum payments on your credit card accounts. Send every last cent you have left over at month's end to the account you've ranked as having the highest interest rate, month after month, until it's paid off. If you receive cash for a birthday, apply it to your credit card account. If you find $10 in change in your car or a $20 bill in an old purse hanging in your closet, all of this extra money should be applied toward your credit card bill until it's paid off — even as you're still making the minimum payments on each of your other credit card accounts.
   
6. Repeat.
   
   When you've paid off your top-ranked credit card account, apply the money you've been putting toward that account to the credit card account listed in the second position, including the minimum payment you've already been making on that credit card. Just as before, any extra money you find should be applied to this account until it's paid off. Lather, rinse, and repeat! Continue this process until each of the credit cards on your list is paid off. Every time you pay off an account, you'll have more money to apply to the next account in line — which will help you pay off your credit card accounts faster.

This systematic, step-by-step method for paying off credit card debt will help you become credit card debt-free more quickly, while helping you pay the least amount of interest possible.