Credit Card Debt

Preface: Allow me to state immediately that this article is not to give you some magical secret to making debt disappear. There is absolutely no way to "legally eliminate debt" without paying it off as many radio commercials claim; unless you file for bankruptcy.

If you are in debt, please read this and don't go searching for those overnight fixes, because they will take your money and run. Just because many services claim to be "non-profit" that does not mean they don't charge a fee!

How Debt Works:
Debt is a loan that you promise to pay back with interest. Each month you make a payment towards your debt. A portion of that debt pays the interest and the other portion pays the principle (the borrowed amount). Once the borrowed amount is paid back in full, the loan has been fulfilled. This is a very general introduction to debt and while there is a lot more to debt and its innerworkings, it goes beyond the scope of this article.

How Interest Works:
Interest is a percentage that you pay to the lender on top of the principle (originally borrowed amount).
Example: You borrow $100.00 at 10% interest. At the end of the year you will have paid me back the original $100.00 plus an additional $10.00 (which is 10% of the borrowed amount).

Debt Consolidation:
If you have many payments each month, it might be a good idea for you to consolidate your debt. Debt consolidation is when you take multiple debts, and package it into one larger debt. The advantage to doing this is you can take multiple payments and turn it into one payment. What this can do is lower the amount that you have to pay monthly, and can sometimes get a better interest rate. The drawback is you tend to pay on the loan longer which means you pay more interest in the long run.

Eliminate Debt:
Debt elimination requires a lot of planning. There is not one plan that will work the best for everyone, but what we will try to cover are a couple of methods that you can use.

First, you need to determine why you need to take another look at your debt. Either you have had an awakening and you want to get out as soon as possible or you are falling behind on your payments and you need to know what to do before you lose everything.

If you are falling behind on payments then that means that you have more money going out then coming in. This is a very bad situation to be in but it can be fixed! The first thing you want to do is get rid of any extra bills that you don't need. Get rid of the internet on your phone, get rid of cable television, get rid of the water delivery service, stop magazine subscriptions, and there is a host of other things you can do to eliminate your monthly obligations to help you breathe easier at night.

After that you can do other things that you hear about often like eliminating the Starbucks trips, and hair stylist appointments. Once you have "cut the fat" from your monthly budget you can determine if that was enough to help your debt problems. If it is not, then we need to dig deeper, consider debt consolidation. If you can get some of your debts to be packaged up into one low payment. Instead of three $60.00 credit card payments, you might be able to consolidate those into one $120.00 payment, which frees up $60.00 a month.

Debt consolidation is a good option if you're having trouble meeting your monthly obligations.

Paying Ahead
Just because the bank tells you what your monthly payment is, it doesn't mean that's all you have to pay! Why pay interest if you don't have to? The banks must wait 25 days before they can start charging you interest on credit cards. If you didn't know that, now you do! That means if you pay that emergency $1000.00 hospital bill with your credit card, you have 25 days to pay it back and not owe a dime of interest! Did you know that if you pay more than the minimum monthly payment that you can eliminate your debt early and pay less interest?

You can! Don't pay the minimum if you don't have to! Here is a good example that helps to put this all into perspective. If you buy a house for $100,000.00 at 5% interest on a 30 year loan your monthly payment will be $536.82. That means paying $536.82 for 30 years will pay off that loan. But what if you add an extra $50.00 a month? You will only have to pay the mortgage for 25 years!

You saved yourself 5 years of payments by adding only an extra $50.00 a month! The same works for credit cards too. If you pay more than the monthly amount, the debt will be paid off earlier. How does this work? As was stated earlier, a portion of your payment goes to the interest and the other portion pays off the principle (original amount borrowed.). So let's say that you make a $50.00 payment and $10.00 goes to interest and $40.00 goes to the principle. Now, let's say that you have the same payment but you decide to add an extra $50.00.

You make a $100.00 payment instead of $50.00 payment. How much of that goes to interest? Did you guess $20.00? If you did you are wrong. Only $10.00 still goes to interest, so the remaining $90.00 went to the principle, which pays the debt down faster! The best part is that the extra $50.00 that you put down will not be charged with interest on your next payment. You've successfully avoided paying extra interest.

This can all be very complicated but to break things down and summarize: If you can't afford your monthly payments, eliminate what you can to free up money. If you still can't, consider consolidating. Speak with the banks and see if they will work with you. As a last resort you can even speak with some of the debt consolidation agencies.

If you can afford your monthly payments but just want to get out of debt, then pay as much as you can safely afford to each month until the debt is gone. While it may be tough at first, in the end you'll actually be keeping more money in your pocket.