The average credit card debt in America is between four to six thousand dollars. With a debt that large, paying only the minimum payment could take up to thirty years and thousands of dollars in interest. Regardless of income, there are some ways to minimize credit debt without sacrificing quality of life.
If you feel that you are burdened with an overwhelming amount of credit card debt, there are three things you can do to insure a financially stable future. First, you will need to create a financial worksheet for you or your family. Secondly, you will need to contact your creditors. Most people are not aware that if they are having difficulty making payments on their credit cards, contacting the creditors can result in lower interest rates. Some creditors will alleviate late fees if that means the customer will start making regular payments. Lastly, you will need to define your financial goals and build up a cash reserve to insure a credit burden does not happen again.
Building a Financial Worksheet
There are three components to a financial worksheet.
A Monthly Spending Log
For one month, record how much you are spending each day. Write down the name of the items. Be very detailed when doing this, because you will need this information when you are doing the second part of your financial worksheet. Include any bill you pay, and include any bill that is automatically deducted from your paycheck or bank account. Don't forget to write even the cheapest of items in your log, including vending machine items, ATM fees, stamps, and coin laundry. At the end of the month, you might be surprised to find that you spent over $100 in vending machine items.
Income/ Expenditure Calculation
Get a copy of all the pay stubs for the people who contribute to the expenses in your family. Using your monthly spending log, write down how much money you are spending each month. Then, subtract that amount from your total income. If you have a positive amount, you should be able to apply this toward your credit debt each month. If you have a negative amount, you will have to look over your monthly spending log and prioritize the items on which you are spending your money.
Final Goal Sheet
Review your monthly spending log, and on a separate sheet of paper, eliminate or minimize some of the unnecessary expenses such as fast food, vending machine items, coffee shop coffees, extended internet and cable services, and expensive vanity expenses. You do not have to completely eliminate the things you enjoy, but you should decrease the regularity of purchasing these things, or find less expensive alternatives. Write down different ways that you can save money, such as using coupons, walking to work or other places (if that is an option), going to the library instead of buying books, and limiting long distance calls. Once you have re-evaluated your expenditure list, subtract that amount from you total income. You should now have a number that is much bigger than you originally had. This new amount is going to be what you must send off to your creditors each month.
Contact Your Creditors
Now that you know how much you can afford to send your creditors each month, you can contact them to try to reduce your costs. Be aware that not all creditors will be willing to work with you, and if your debt is now in the care of a collection agency, you will have a more difficult time trying to reduce your costs.
Bargain With the Debtor
When you call your creditor, you can ask if there is a way to set up a payment plan that works within your budget. Tell your creditor that you are having difficulty making your current payments, and that now that you have late fees added on to your account, the burden has become too great for you. By saying this, your creditor will be assured that you will make payments, and the creditor will want to find a way to insure you will. One way of doing this would be to alleviate your late fees provided you make a payment right away. There is also the possibility that your interest rate will be lowered for the remaining balance if you close your account. If the creditor does not suggest any of these options, go ahead and ask for them.
Get the Info on Your Account
Ask the creditor how much you are spending in interest, and find out how long it would take you to pay off your debt at your proposed payment. Find out if there are any hidden fees, such as yearly fees, additional interest rates for specific purchases, and cash withdrawals.
Transfer Balances From High to Low
If you have more than one credit card with available credit on them, transfer debt from your highest interest rate card to you lowest rate card. When you contact your creditor of your low interest card, ask if you can get any special incentive for transferring debt to that card. If you have no available credit on that low interest card, explain the situation to the creditor, and explain that you would be better able to make payments if you were approved for a high enough limit with the same or lower interest rate.
Your Financial Freedom: Defining Your Overall Goals
After having calculated your expenses and contacted the creditors for a better deal, you should have a pretty good idea of your financial situation. Before investing a lot of money into savings accounts, you should concentrate on your debt. You should, however, try to save up enough money while you are paying down your debt to insure that you do not have to use credit when an unexpected expense arises. Define your long-term goals, such as buying a house, getting married, having a child, or buying a car. Calculate how long it will take you to pay off your debt and calculate how much money you will be able to put into a savings account or investment account once those debts are cleared.
Keep in mind that once you pay off one creditor, use the money that you were paying to that account to pay off another account. Also, each time you get a raise, use the surplus to pay off creditors rather then letting that extra money slip into perishable items. By doing that, you are paying down your debt more quickly, without the added weight on your quality of life.
The Bottom Line
Know exactly what you are spending and what you need to pay. Stick to your spending plan for paying off your debt. If your monthly spending log shows that you should have a surplus at the end of each month, then you are spending money on things that you don't even remember buying. That surplus should go to your creditors before you spend it on unnecessary things.
A sound financial plan is an investment in you and your family. If you stick to your plan, you should avoid bankruptcy, improve your FICO and credit scores, and eventually have more money to spend on the things you really need.