As tax season disappears in the rear view mirror, one subject that seems to get a lot of attention around this time is credit card debt. If you're one of the many Americans with sizable credit card debt and you just received a fat tax refund, you might be trying to find out how you can use part of that money to help escape the monthly grind of credit card payments.
While a large refund is the first step, the key to paying down credit card debt is more systematic than a large payment. You need to change your behavior and adopt some of the strategies I list below in order to truly escape credit card debt. Although the tax refund won't hurt, it may not be enough to keep you out of debt.
Paying off debt is just like losing weight — it's a numbers game. Consume more calories than you expend in a day, you will accumulate fat. Spend more dollars than you earn in a day, you will accumulate debt. The ugliness of debt is that it'll keep growing even if you get your numbers in balance. Imagine if every pound of fat on your body continued to grow at 19.99 percent a year... now you understand the insidious nature of debt.
To combat this, you need to shed that debt and the only way to shed it is to spend less, putting those savings toward that debt. Conversely, you can also try to earn more and put the additional earnings toward debt. Either way, you will need to start budgeting in order to find the extra dollars. You will not succeed at killing your debt if you do not know how much extra you can afford to pay each month.
Consider Balance Transfer Offers
The best credit card balance transfer offers are for zero percent interest for at least one year, which gives you the opportunity to pay down your debt as quickly as possible. With every penny going toward principal, rather than double digit interest rates, you have one full year to catch up. These offers usually have a transfer fee, somewhere in the neighborhood of 3 to 5 percent, but that fee is likely much lower than the interest rate you're currently paying.
When researching an offer, be sure to understand the balance transfer fee, the promotional period, and the expected interest rate after the promotional period expires. The interest rate is likely going to be similar to what you're being charged now. Finally, do not use the credit card at all — the new debt will accrue interest at the non-promotional rate.
Use Your Debit Card
If you want any hope of paying down your credit card debt, you must stop accumulating credit card debt. Cut up your credit cards. When you carry a balance, you lose the month-long grace period on your purchases. Any purchase you make on a card carrying a balance accrues interest immediately. By using that card, you are simply digging yourself deeper and deeper into debt. It's like working out at the gym and cooling down with a milkshake; it just won't work.
To counter this, go strictly cash only. Everything you pay for must be with cash, or with a debit card linked to your bank account, rather than credit. You can't pay off credit card debt if you are accumulating it at the same time.
Call your credit card company and see if they would be willing to lower the interest rate on your credit card balance. If you've been a loyal customer with on-time payments, they may consider lowering your interest rate if you just ask politely. They know that you can always transfer the debt to a competitor so this isn't much different than calling up your cable provider and asking for a better deal.
It helps to have some balance transfer offers on hand in order to help convince the customer service representative that you might move your balance. Just knowing that different issuers have great offers out there shows that you've been doing your homework.
If you have a significant amount of debt and you've tried everything else, don't be afraid of filing for bankruptcy. Bankruptcy isn't easy, it's a long arduous process in which your financial life will be put on display, and anyone who has experienced it will tell you that it's not a pleasant option. But it is an option and one that deserve your attention, because sometimes there is no other way. If you do, you will be asked to consult with a bankruptcy specialist and you will need to go through the courts. It will trash your credit for a number of years, so don't take this decision lightly. That said, chemotherapy isn't pleasant either and sometimes that's the only way.
Credit card debt is a heavy burden on anyone's personal finances, so the sooner you can pull yourself out from under the specter of that debt, the better.
Jim Wang writes about personal finance at Bargaineering.com. When he's not tackling money issues, he's usually looking forward to his next vacation and writing about it at Wanderlust Journey.