5 Steps for Getting Out of Debt

These not-so-obvious techniques will help you get lenders off your back.

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Today’s guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card offers.

Do you feel as though you’re drowning in credit card debt and don’t know how to get back above water? All is not lost. Even if you think you don’t have enough money to pay your bills don’t give up and put your head in the sand.

[In Pictures: 12 Money Mistakes Almost Everyone Makes]

Here are five steps you can take to get control of your debt situation.

Step 1: Rethink your necessities

Many of us have lost track of what is truly necessary in life. Necessities are things like having food on the table, a place to live and access to basic healthcare. Everything else that you spend money on is something that you want but can do without. In order to find more cash to pay down debt you need to reassess this spending. Maybe you’ll need to shut off cable for a while, or at least cancel a few of those premium stations. Or possibly you can reduce the level of your cell phone service to basic costs.

Maybe you’ll need to start bringing lunch to work rather than going out to eat every day. Make whatever changes you can to increase the cash you have available to pay down debt.

Step 2: Use the Snowball Method to Pay Down Debt

One of the best ways to get rid of debt is to use the Snowball Method. Think of your payment like a snowball racing downhill and growing larger as more and more debt is paid off. As it grows, you’ll have more to pay down other debt.

Start by making a list of all your credit balances. Then figure out how much cash you have to pay down these balances. Hopefully, you’ve found some extra cash by rethinking your necessities.

Total the minimum payments due on each of your cards. For example, suppose you owe money on four cards and each one has a minimum payment of $50 for a total of $200. By making some changes in your budget you find you can afford to pay $400 toward your credit card bills. That means you can afford to pay one card an extra $200 dollars over the minimum payment for a total of $250 on that one card and $50 on the remaining three cards.

[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

Choose the card with the highest interest rate and pay $250 to that card. Then pay the minimum balance of $50 to each of the other cards. When the first card is paid off you will then have $300 (i.e. $250 plus the $50 you were already paying) to pay to the card with the next highest interest rate. Keep building the snowball as you pay off each card. When your cards are all paid off you can then use that building snowball to pay off a car loan and when that’s paid off use the cash you have earmarked for debt payments to start paying extra on your home mortgage principal.

In addition, you may be able to reduce your interest costs as you pay down your credit cards by transferring to 0 percent APR credit cards.

Step 3: Don’t Pay Your Cards If You Can’t Afford the Minimum

If you just don’t have the cash to pay even the minimum due, stop paying. You don’t help your situation when you don’t pay the minimum. The credit card company will treat you as if you paid nothing. You will still become more delinquent and you will still get the late fee.

Step 4: Try to Negotiate with Your Credit Card Company

After you’ve stopped paying because you just can’t afford it anymore, it’s time to call your credit card company and try to negotiate a pay back arrangement. You should also try to get your interest rate lowered. Before making that call figure out exactly what you can afford to pay.

Call the customer service representative at the credit card company and tell him or her your bottom line—what you can afford to pay. Remember this customer service person is just like you, so talk calmly about your problem and ask for help in finding a solution.

If the customer service representative comes back to you with an offer you just can’t afford, tell them you can’t afford to make that payment. Don’t agree to something you can’t afford to pay.

[Visit the U.S. News Personal Finance site for more insight and money management tips.]

Step 5: Seek Professional Help If all the above steps fail and you still need help getting control of your debt, there are at least three different ways to get help to erase your credit card debt. You can seek a debt settlement, where a counselor can help you negotiate to lower your total debt and then pay it off. You can consider debt management, where a debt counselor may be able to arrange lower interest rates and develop a plan to pay off your debt in 30 to 60 months. Or you can consider filing bankruptcy and wipe out your debt. Compare these options for seeking debt help.

The key is not to just wait until bad stuff happens. Letting unopened bills pile up on your table will only make the situation worse. Try to find a solution yourself, but if you can’t, seek help.