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Choose strategies to reduce your credit card debt

June 04, 2010|By LYNN LITTLE / Special to The Herald-Mail

Using a credit card is an important responsibility. A good credit history can help you get a job, make major purchases and accomplish many short and long-term goals.

A poor credit history can make it harder for you to rent an apartment, buy a car or fulfill a dream. It is important to know how credit can change your spending power and how you can recognize the danger signs of credit and avoid serious problems.

The greatest disadvantage of credit use is losing financial flexibility in managing your own money. For example, if your credit card debts take 10 percent of your after-tax income, you can't spend those dollars for something else. Credit cards can reduce your future buying power if you carry a balance and let finance charges build up.

How can you get rid of your credit card debt? The first thing to do is get all your credit card bills together. For each account, write down the total balance and the minimum monthly payment required.

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The next step is to be sure you can make the minimum payments on your credit cards. Look at your spending and make cuts where you can to find the money to pay your credit card bills. If you have trouble doing that, the National Foundation for Credit Counseling (800-388-2227) or Myvesta.org (800-698-3782) can help.

Credit card companies require a minimum payment each month. If you pay only the required minimum payment, it can take a very long time to clear your balance. For example, if you have a $2,500 balance at 21 percent interest and you pay 2 percent of the remaining balance each month (a typical minimum payment), it will take you more than 63 years to pay off your debt. It would cost you $14,699 in interest charges.

o Plan to do more than just pay the minimum. If you pay $50 each month for the example above, it would take you 10 years to pay off your $2,500 balance and cost you $3,493 in interest charges.

o Pay high-rate cards first. At higher interest rates, more of your monthly payment goes toward finance charges. Quickly paying off balances on cards with high rates can free up cash to pay other bills.

o Pay off cards with the smallest balances first. Paying off cards with small balances gives you extra money to pay on the bigger balances.

Once you pay off a bill, next month add the amount you've been paying to pay on one of your remaining creditors. Visit PowerPay.org to determine how soon you could be out of debt and how to eliminate debt faster by making power payments.

o Stop making new charges. If you have to, cut up your cards, hide them or lock them in a drawer.

o Stay flexible. The key to sticking to your credit card debt repayment plan is to stay flexible. If you find that you set unrealistic spending limits in the beginning, revise your spending plan the next month.

Once you have reduce your debt load you can work to increase your savings and gain control of your financial future.

Lynn Little is a family and consumer sciences educator with University of Maryland Extension in Washington County.

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