Credit card debt reduction in 4 easy steps
- Call your credit card companies to negotiate lower interest rates.
- Revisit your budget to free up as much cash flow as possible.
- Prioritize your credit card balances for elimination based on your budget.
- Focus your cash flow on eliminating one debt at a time to become debt-free.
Finding the best way to reduce credit card debt for your situation
As you decide on the best room to reduce recognition card debt, there are two basic tactics you can use. The scheme we outline above stays the same no matter which path you choose. The difference is how you prioritize your credit batting order debts for the decrease in Step 3. We go into more detail on each step below, so you know precisely what to do at each stage to get out of debt .
Startegy 1: Start with the highest interest rate first
This is the fastest and most cost-efficient method to reduce credit card debt because you focus on high APR debts inaugural. If you owe $ 1,000 on a credit calling card with 20 % APR, it costs more money each month than the same balance on a card at 15 % APR. Eliminating high APR debts inaugural reduces the entire monetary value of getting out of debt .
here ’ s how to reduce credit poster debt with this method acting :
- Use a credit card debt worksheet to list out all your debts. You specifically need to note each current balance and the APR.
- Call each credit card company to see if they will negotiate to lower your interest rates; if so, adjust the interest rate on your worksheet accordingly
- Prioritize the list from highest APR to lowest.
- Now review your budget to cut any unnecessary expenses; this maximizes the cash flow you have available to pay off debt.
- Make the minimum payments on all your debts except the one with the highest APR.
- Then make the largest payment possible on the debt with the highest APR.
- Keep that up until the debt is gone, and then move on to your next highest APR debt.
As you eliminate each debt, you free up more money to pay off the following debt. This accelerates repayment until you reach zero on all your balances. This acceleration to reach the penetrate is why this method acting is normally referred to as the Debt Avalanche—a term coined by the fiscal adept Dave Ramsey.
Strategy 2: Start with the lowest balance first
If your highest april debts are besides your biggest balances, the first method acting of debt decrease may not work. This is particularly on-key if you couldn ’ t free up any extra cash for debt elimination because your budget is nasty. In this case, you may not have adequate cash stream to tackle your largest debt first. rather, you need to pay off your smallest debts first to gain the momentum you need.
All the steps above stay the lapp, but you prioritize your debts in Step 3 by current balance. You start with the lowest balance first, which frees up money bit by bit. Each debt you eliminate gives you more money to take out the adjacent debt.
With crane style, you basically start pecking away at your debts. Each debt that you knock down gives you more fiscal power to take out the next. By the time you get to your biggest balances, you have the monetary baron you need to take them down .
This is besides called the Debt Snowball method .
How long should it take to reduce debt to become debt free?
This depends on which method acting of debt decrease that you use. But a good rule of finger for making a debt reduction plan is that it should never take more than five years to get out of credit card debt. That means you should be able to pay off all your recognition card balances with 60 payments or less. If you can ’ t eliminate your debt in-full within 60 payments no matter how much you scale back your budget, then you explore options for debt relief .