Use the tools and resources available at your credit union to help you get out from underneath credit card debt.

Americans currently owe over $798 billion on credit cards according to the latest Federal Reserve statistics.  Things have gotten tougher for the millions who carry a balance as banks have raised interest rates, reduced lines of credit, and closed accounts that haven’t been used in a given period of time, sometimes as short as 6 to 12 months.  This has made it much more stressful for those trying to hang on and move ahead.

What is the Best Plan?

If you still have your job, but realize that there are not any guarantees in the workplace, and want to get rid of your credit card debt, what is the best way to go about doing so?  You don’t want to empty your credit union share account only to have an emergency or job loss occur, but you do want to choose the steps that minimize will pay the cards off as quickly as possible, minimize the interest you will pay, and reward you psychologically for staying the course and reducing your debts.

Pay More Than the Minimum

Of course, step number one is to pay more than the minimum.  But how much more should you pay?  Should you pay the extra amount on just one card, or split it between multiple cards at the same time?  Let’s run a few numbers.  If you had a $2,000 loan on a card which had an 18% rate, and you paid the minimum amount (typically 2%), it would take you about 22 years to pay off.  If you bumped that up to 5%, it would only take 6.5 years.  Finally, if you could pay 10%, it would take just less than 3.5 years.

Can You Afford the Solution?

Now it is time to see what works best for you.  Gather up your credit cards and see if you can pay 5% on each of them.  If so, then according to our calculations above, you should have them all paid off in about 6.5 years depending on the interest rate on each card.  If you can afford 10% on each card, you should be free in about 3.5 years.

An Affordable Solution

However, most people will not be able to do this.  In that case, there are two approaches based on taking the amount you are paying now and not reducing that until all the cards are paid off.  My favorite is to rank the card from lowest balance to highest balance.  Then add up the payments on all the cards.  This is the amount that will be paid on your credit cards from this point forward until all the cards are paid off.  (Of course if you want to pay extra, either each month or only occasionally, you can – it will only accelerate the payoff.)  Pay only the minimum on all the cards except the one with the lowest balance.  Pay all of the remaining amount onto the card with the lowest balance.  When that card is paid off, continue to pay only the minimum on all the cards except the new lowest balance card.  Repeat until done.  I like this approach because it give you wins early and often.  This helps keep you motivated.  Also, it is quite possible that your credit score will rise as you reduce the amount of debt versus available credit.

The second of the approaches is to rank the cards according to annual percentage rate (APR) and pay the card with the highest APR first.  While it is true that this method will insure you pay the least amount of interest, the difference is small, especially compared with the costs you would have paid without putting a program in place.  If you have the discipline and want the lowest cost solution, this is it.  However, in a long term plan like this, I find that the early and steady success of the lowest balance card first provides a greater chance of overall success.

Use Your Credit Union to Ensure Success

Whichever approach you choose to take, automate it.  Set up a second account at your credit union which will be used to just pay your credit card bills.  Then either have your payroll deduction send the proper amount to each account, or have your credit union automatically move the proper amount from  your main checking account into the credit card payment account every two weeks or month depending on  how often you get paid.  Then use the automated bill payment program available at your credit union to make the payments you have planned out.  If your credit union is very small and does not offer this option, you can always go directly to the websites of each credit card, and sign up for them to draft you credit card payment account on a set day each month.  This option has been free at every credit card site I have used.

Success is Within Your Reach

Stay the course.  Your biggest risk will be the tendency to go back to only paying the minimums.  Reward yourself when you pay off a credit card, or when your debt reaches key milestones on its ways to zero.  Long term your financial health with improve, your credit score will increase, and your stress level will go down.  In addition, having free cash flow to invest in your retirement and the ability to pay cash for vacations and new cars will give you a sense of control and freedom that you cannot even imagine yet.

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