Reducing Credit Card Debt

Americans have a staggering amount of credit card debt, often a result of coping with stagnant wages and rising costs.  And let’s face it buying stuff is fun.  All combined, it’s easy to let debt build-up to the credit limit on multiple cards.  Most recently you may have found it necessary to use credit cards to deal with the first few weeks of the COVID economic and employment crisis.

Regardless, you may be stressed wondering how you can ever pay down that debt.  Good intentions rarely go very far.  Nor is self-discipline really the key.  What you need is a plan.

The Plan

Here’s our plan for paying down credit card debt, step by step.

  1. Stop adding to your debt to the greatest degree possible.  If you don’t economize you’ll stay on the treadmill.
    1. Eliminate at least some indulgences, like a morning mocha or lunches out.  It helps to start by spending a week or two writing down every time you spend money.  You’ll likely surprised to discover how you can free up one or even two hundred dollars a month.
    1. How much could you bring in with a yard sale?  Especially if that means no more self-storage payments.
  2. Try to consolidate everything onto the one card with the lowest interest.
    1. It’s generally advisable that you start by paying off the card with the highest interest rate first.  Increase that payment as much as you can until it’s fully paid off.  Then move on to the card with the next highest rate.
    1. In some situations, it may be possible to consolidate all your credit card debt into a single lower interest loan.  Work only with a reputable bank, but even then be extremely careful with the terms — fees, hidden fees, the length of the loan, minimum payments, and early-payment penalties may actually leave you worse off.
  3. Pay aggressively and systematically.  It’s sometimes better to make more than the minimum payment on many or even all of your cards.  But it’s OK to pay only the monthly minimum for low-interest cards together with as much as you can on a single card.
  4. Postpone investing and saving for retirement unless there’s a dollar match from your employer.  Usually, credit card interest is greater than investment returns, often by a factor of 2 times! So postpone investing until your debt is paid down.
  5. Ask for a lower rate.  You might be surprised how often that’s granted.  Interest compounds every month so a large portion of each payment is simply that interest.  It’s not uncommon to end up paying a total of 2 or even 3 times the original purchase price of an item.
  6. If your debt is at panic levels and you’re more than 59 1/2 you might consider a withdrawal from a retirement account or cashing out a life insurance policy.  This isn’t to be taken lightly, and should only be taken after consulting with a financial or tax adviser

That’s our top six steps for dealing with credit card debt.  Everyone’s situation is a bit different, but follow as many steps as possible.  We also recommend overcoming any embarrassment and seek credit counseling from a reputable adviser.

IMPORTANT NOTE:  This plan is appropriate for many but not all situations and is no substitute for a detailed appraisal of your financial situation and available options.

Pacific Tax & Financial

Yes, we’re open and doing business for the many accounting and tax services that shouldn’t be put off.  And we salute the brave and diligent health care workers and first responders.

In addition to 2019 filings, we offer tax, trust, and estate services since 2000.  Plus a long list of services for businesses. 

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