Friday, August 26, 2011

Living Big on a Small Budget - Paying Down Your Credit Card Debt

The following is a guest post from Pamela Olsen. Pamela is a stay-at-home mom with three boys and a girl all six years and under. She is the owner of The Busy Woman’s Guide to Surviving Motherhood, a blog filled with all sorts of information intended to make life as a women and mother easier in some small way. Her hobbies include blogging, couponing, scrapbooking, reading, gardening, writing and volunteering. When people ask her when she has the time for all that she simply says “I am a planner!”

One of the most important lessons that I have learned over the years of paying credit card bill is this – just paying the minimum on all your cards really doesn’t get you anywhere. A very small portion of that minimum payment actually goes to pay down the principle (the amount you owe the company). A majority of the minimum payment goes to the interest you have racked up by “borrowing” the money from the creditor and not paying it back right away. The whole point of credit cards is to spend money that you don’t have at that moment, but you promise to pay back in a timely fashion. But the longer it takes for you to pay it back, the more it will cost you, which is exactly why the credit company is willing to take the risk of loaning you the money to begin with

So if you have amassed a few different credit card or loan accounts, it might become daunting to try to make any headway. The most important thing to remember is that unless you win the lotto tomorrow, it’s going to take a little time to pay it all off but if you make a plan – and stick to it – it will happen. Here’s how to get started:
• Sit down and make a chart of all your creditors with a column for each of the following – balance, limit, minimum payment, average finance charge each month and interest rate.
• Then do a little math to determine which one is costing you the most in the long term and then rank the rest from highest to lowest.
• Starting from the top of the list, start paying down by simply paying $5 or $10 above the minimum payment each month and continuing to pay the minimum on all the rest. If you can afford more great, but do not over extend yourself. You will be surprised to see how much faster your balance will drop then when you just paid the minimum.
• Once that card is paid off, do not close the account. You must have active credit to get new credit.
• Then take the amount you were paying on that credit card and add it to the minimum payment due to the next creditor on your list. You already had it in your budget and now you can really make a dent in your debt.

As I said, this will not happen over night, but once you get through one card, you will see things speed up. Another key point is to try not to accrue any additional debt while you are doing this, because that just defeats the purpose.


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