List Everything OwedStart with making a list of everything you owe. This includes monthly credit t card payments, car payments and your mortgage or rent. Don’t forget to add in ongoing expenses like phone bills, utilities, Wi-Fi, and cable. You have to eat. What do you spend on food each month?
You’ll then know the amount of debt and what you need to pay monthly. You'll also understand what you need to do to keep your debt from adversely affecting your credit score.
Create a Financial BufferBefore you start seriously whittling away your debt, start an emergency fund. You should have at least $1,000 saved. This should never be touched except for emergencies.
Use the Snowball MethodOnce you have your emergency fund established, it’s time to tackle debt aggressively.
You’ve already listed your debt. Now rearrange it from the smallest to the largest (don’t count utilities, phone bills, etc.). This applies to your credit card payments.
Go after the smallest debt first. If you can double or pay extra, then do that rather than pay just the minimum payment. You want to pay off this card first. You'll still be paying the minimum on other credit cards; it’s just you’ve made the smallest the priority.
Once you’ve paid off the smallest credit card, apply that payment to the next largest card. This will be in addition to the minimum payment. Repeat this method until you’ve paid off all your credit cards or car payments.
Eliminate All Credit CardsIn conjunction with the snowball method, cut up your credit cards. This will keep you from swiping them when you see those new shoes or jackets you’ve always wanted.
This will keep you from swiping that card for instant gratification. The credit card industry says closing a card is a bad idea because of the debt-to-credit utilization ratio. This is the amount of credit you have available versus the amount of credit you’ve spent. A 30 percent ratio is the standard for good credit.
Credit utilization is one of the most significant factors in a credit score. A maxed-out credit card can lead to severe consequences to this ratio. That’s because a maxed-out credit card will also increase your credit utilization.
So, regardless of what you do, you’ve hurt your credit score.
Besides the credit-utilization ratio increasing, your minimum payments will also increase. This takes even more money out of your paycheck per month.
The Envelop System Tracks MoneyInstead of credit cards, use the envelop system.
Overspending often occurs when nothing is telling you to stop. You don’t see the money disappearing until it’s too late.
The envelop system tracks how much money you have budgeted for monthly activities. You place cash in these envelopes and label them. There are the groceries, eating out, clothes, etc. envelopes.
Suppose you have budgeted $500 for groceries monthly; when you receive your first paycheck, you should place $250 in the envelope. When you receive your second paycheck, place another $250 in the envelope. This will keep you within your budget.
If you’re making purchases online, write down the amount on the back of the envelope, and don’t spend more than what is in the envelope. When you’ve written down as much as is in the envelope, you’re finished spending it for the month. The money in the envelope will carry over to the next month, and the money you would have placed in it the following month will go toward a credit card.
On the other hand, if you’ve been frugal and haven’t spent all the money, put the excess dollars toward your credit card.
Avoid Temporary SolutionsMany people will consider debt consolidation. It often results in a large payment that some will find hard to handle. It also stretches out the interest you’d be paying. Instead of small credit card balances with interest that you can rid yourself of using the snowball method, you have a large balance that will take years to pay, and the interest just increases the total amount.
That’s a lot of money toward items you paid for with the credit cards. The price of those pair of shoes that were on sale has just doubled in cost due to interest.
Credit Repair Takes TimeAs long as it took you to accumulate this debt, it will probably take you as long or longer to rid yourself of it. Don’t be frustrated. It takes patience and discipline.
If you’re really in over your head, consider a non-profit credit counseling agency. For profits can sometimes be scammers, so be careful who you choose.