Easy Plan To Eliminate Credit Card Debt

Consolidating, Paying Off And Downsizing Your Way Debt Free From Credit Card Debt

Credit card debt is a serious problem for a lot of people.  It is difficult to find even higher income persons who haven't, at least once, wound up owing more than they were comfortable with on a credit card.  When you start using credit to buy things, rather than cash, it's simple to forget that debt is easier to owe than it is to pay off.  The only solution to credit card debt is to pay off what is owed.

Other plans will tell you to go through a "debt counselor".  Debt counseling is frequently no more than an introduction to some company that will consolidate your credit card debt into one debt that you now owe to them.  These companies, who actively prey upon people who are already in dire financial situations, are typically the worst companies to owe.  While they may be able to cut your payments down, you will be hard pressed to find the best interest rates from a debt counseling service that refers you to one of their consolidation lenders. 

Here, we will consider some consolidation activity, but that's not really the meat of the plan.  The only way to move forward with your financial life after suffering under a large credit card debt is to eliminate your debt.  There's no way to eliminate it without paying it off.  There's also no way to avoid getting yourself in the same money trouble later without changing your habits.

So here is the step-by-step plan to dig yourself out of debt:

First, you will want to take an honest assessment of your financial situation.  Drag out a pad and pen and start tallying up your monthly bills.  For bills that vary, like the power bill, I recommend that you consider the highest amount you can remember paying for that bill.  Write down what each bill is for and, next to it, write down how much you pay monthly.  Include payments you make to any retirement fund you might have.  This isn't debt, but it does take money off the table that you can't spend now.  Also include what you think you spend on groceries, gas and other regular expenditures to get by on a daily basis.

When you finish, you will have a big list of bills, debts and other items if you're like the majority of people.  Add everything up.  That's your "Outflow" every month, at least as far as we are concerned here.

Now, tally up how much income you make every month.  Only count things that are certainties, like your job, social security check, or trust fund disbursements.  Do not count things that vary or anything you don't have reported on your IRS income tax forms as income.  This is your "Inflow".  We only count the certainties here: no pie in the sky items or things that come to you intermittently (like big wins on ebay).  You keep the non-reportable income out because nobody would usually consider those things "income" when considering you for a loan.

Second, you will want to do the crucial calculation:

Inflow - Outflow = Available Funds Monthly.

Look at the number.  Now, that number is the truth of your situation right now.  That number is what's left of your money every month after you pay your credit card bills and your usual expenditures.  Take that number and use it in this calculation:

Available Funds Monthly / Inflow = Percentage of Income You Can Save or Use to Eliminate Debt

That figure is key.  If you want to keep your credit rating looking good, save more money, and live a better and more financially healthy life, you have to get that figure to go higher.  You have to do something to move the needle!

When lenders consider your "debt-to-income ratio", they are looking at something very similar to this.  Debt-to-income ratio is another factor, often just as or even more important than your credit score, that may influence whether you can get loans or access to other credit. 

Third, make a small box next to each item on your Outflow list, just large enough to hold one handwritten word.  Go through that list carefully and decide, for each line item, which of these categories it fits into:

  1. Fixed: We'll call something "fixed" if you can't affect the cost of it at all.  If you can't cancel it, pay it off faster, do without it, get rid of it or otherwise move it out of your life, it is a fixed cost.  For example, if you have already made sure you're paying the least you can for car insurance, you've already shopped around, already gotten all the quotes, already checked if you qualify for all the discounts and you truly must have a vehicle then that expenditure is "fixed". 
  2. Changeable: We'll call something "changeable" if you can't get rid of it altogether but you can make the bill go lower.  It doesn't matter whether you want to change it or not.  If you could change it to make it lower, mark it "changeable".  For example, your credit card debt would NOT be just changeable because you can pay it off.  You can be rid of the credit card debt, so it is more than just changeable.  Your phone bill, however, if you really must have the phone, is only changeable.  Regardless of where you get cell phone service, if you have to have a cell phone then  you must have some kind of cell phone bill. You can change that line item, but you can't erase it like you can the amount you owe for credit debt.
  3. Optional: We'll call something "optional" if you could just cancel it tomorrow without affecting your employment, your Inflow or your health.  Again, it doesn't matter if you want to get rid of it or not.  If you could be rid of it, it is optional.  For example, your subscription to the Wall Street Journal is optional.  You can cancel it at any time and stop paying for it.  Your credit card debt is NOT optional.  If you don't pay your credit card balance, you'll be in big trouble! 
  4. Pay-off-able: We'll call it "pay-off-able" if you can pay it off, at least eventually, and be rid of it.  Car payments, credit card debt, and other loan payments fit here.  These are things you can't just choose to stop paying without consequences, but you CAN pay them off and be rid of them.

Fourth, you're going to make some hard choices.  Ignore the "fixed" expenses.  You can't stop paying your alimony, and changing it would take a federal court order.  Stuff like that we'll just pass over.

We start with the low-hanging fruit: the "optional".  Rank these things based on how truly necessary they are to you and how much you feel you actually want them.  Now, cancel all of them and live without them.

Eeerrrrrrk!  WHAH?!?!

You're the one who said you wanted out of debt!  Cancel all of them.  At the end of the day, you do what you want.  My advice to you is to cancel all of them.  Would you be reading this article if you didn't need to?  Just take the plunge.

We move to the next-lowest-hanging fruit: the "changeable".  Think about ALL the things you could do to change these bills and other items so you'd have to pay less.  Can you cut water usage?  How about your electricity consumption?  Can you stop leaving the TV on at night?  Have you found the lowest rate on car insurance?  If none of the reasons you need a phone actually have anything to do with a gigantic data package from your cell phone service provider, then you can lower your cell phone bill by cancelling that.  Trim all the changeable bills by cancelling all the features and trimming all the fat you don't honestly need to function, be healthy, and do your job.

Now we are ready to deal with your pay-off-able items.  In order to be rid of credit card debt, you need to have enough Available Funds Monthly to save up so you can knock it out.  Rank all the pay-off-able items in two ways: how easy they are to pay off quickly and, in order, from the largest monthly bill to the smallest.

You are going to attack those debts this way.  Seek to eliminate the largest monthly bills that are also relatively easy to pay off quickly.  So, if you have 8 months left on your car note and, if that car note is your largest monthly pay-off-able bill, you will attack that one first.  If that's your credit card bill, you're going to attack that debt first.

That's your basic plan.  Eliminate monthly bills and expenditures so you can get more Available Funds Monthly pointed at paying off bad debts.


What if your pay-off-able bills are ALSO changeable?

Did you already realize that there's nothing about being pay-off-able that entails NOT being subject to change.  For example, you can pay off one debt with another.  You'd still owe the money, but you might get better terms or a lower monthly payment.

This is where credit card consolidation comes into play.  Look for an offer that provides 0% APR for balance transfers.  I am a Bank of America customer, for example, and they have a program where you can open a credit card with them, then transfer balances from other credit cards to it.  As long as you comply with the terms and make your payments on time, you'll pay 0% APR for the first year.  Other banks and credit unions offer similar programs.

That's the way people usually approach it.  However, there's another way.  Remember what we said about "debt-to-income ratio"?  Well, if you dropped everything optional and changed everything that was changeable to make your monthly bills lower, you've made yours look a little better.

So let's get out of bed tomorrow and go to a bank or credit union.  We're going to sit down in front of a banker and say these words:

"I have ___ credit cards right now and I'm paying $x,xxx.xx per month toward retiring that debt, if I add up all these bills.  If I put together everything I owe it is $xx,xxx.xx, altogether.  I'd like to look at options for lowering my monthly payments and the interest rate by taking out a bank loan to pay off the credit card."

Let me tell you a secret: Banks want to lend people money.  You're a person.  Ergo, the banks want to lend you money.  If your credit is good, and if you can show a favorable debt-to-income ratio that gives them assurance you can pay them off, they want to loan you the money.  Just go to a different bank besides the one(s) you owe for the credit card, walk through the application procedure, and see if you qualify.

If you don't, just attack those bills in the order suggested.  Go from the easiest bills to pay off that feature the highest monthly payment, all the way down to the lowest monthly bills that are the hardest to be paid off.  Meanwhile, protect your Available Funds Monthly and keep the most Inflow going there that you possibly can.

As you pay off debts, cancel optional items, and realize savings on changeable items, roll those additional funds toward debt retirement.  Getting free of credit card debt can be tough.  If you're careful and methodical, you can eventually gain freedom.