Here's an seven step plan for getting rampant credit card debt under control.
1. Hide Your Credit Cards The first step is to hide your credit cards in a place where you could access them in an absolute emergency, but that they'd be very difficult to find. Put them in a little box way in the back up in the attic. Freeze them in a big chunk of ice. Hide them in the back of the cupboard at your mother's house. Make sure it's somewhere where you cannot easily access them.
Then, go to every online account where you use a credit card regularly and delete your credit card numbers there. Amazon. PayPal. World of Warcraft. All of them. Make sure that you're not forgetting anything. If you absolutely must retain a service, use a debit card number instead of a credit card number.
Why do this? Your credit card balances need to go down, not up, and the biggest step in doing that is to break yourself of the habit of using them without a connection to the real money you're spending. That means going back to using cash, checks, and debit cards - if you don't actually have the money, you're not spending it.
2. Figure Out What You Owe The next step is to dig out the most recent statements for all of your credit card bills and determine exactly how much you owe and what the interest rates on each of the bills is. This information should be easily found on your most recent statement, but if you're having difficulty finding the information, call up your credit card provider (the number on the back of the card) and get that information.
You should be making a list of all of these: credit card name/type, current balance, and interest rate. This way, later on, when you develop a plan, you can use this master list to figure out which credit card to pay first.
3. Request To Lower Your Rates Now that you have all of your information at hand, go through them and try to get some of your rates reduced. For each card, call the phone number on the back and directly ask for a rate reduction. If you get a response that does not give you what you want, ask to speak to a supervisor.
Be polite, even if you don't get what you want. Yelling won't solve anything at all and will likely reduce your chances of getting what you want.
State that you're looking at transferring that balance elsewhere. This gives you at least some degree of leverage in the conversation.
Be realistic in your expectations. A 3% reduction IS a great success. If you have a $5,000 balance, 3% is a savings of $150 a year.
4. Zero Percent Balance Transfer Offers Once you've squeezed down the interest rates on your cards, see if there are any balance transfer offers available to you, either on your current cards or possibly on a new one (zero percent transfers are the best, but long-term ones that are lower than what you're currently paying are solid, too).
The first place to look is with your current cards. Identify any balance transfer offers available with these and note the interest rates and the term. The longer the term, the better.
Then, start transferring! Transfer your highest remaining card balances first and keep moving down the list until your interest rates are as low as possible.
You should note that quite often doing balance transfers will result in a card having some of the balance at a certain percentage and the rest at another percentage. Since you often can't control which portion of the debt you're paying, I usually recommend figuring out the average interest rate for that card. So, let's say you have $10,000 total on that card, with $7,000 at 3.9% and $3,000 at 18.9%. Just take $7,000 x 3.9 and add it to $3,000 x 18.9 to give you 84,000, then divide that by the overall bill total, $10,000, to give you 8.4%. This is the interest rate you should consider that card to have - it's not perfect, but it's a good thumbnail sketch.
The next step is to liquidate some of your unnecessary assets and use the proceeds to pay off your highest interest debts. We all have stuff laying around that we don't really need - DVDs, video games, CDs, baseball cards, books. Take a frank look at all of your possessions and ask yourself honestly which ones you actually are using regularly and which ones are gathering dust. Then dig out those items and get some value for them. Some recommendations:
Sell items that have significant individual value online, such as CD or DVD box sets, high-value individual trading cards, and so on. Those items will recover the value of the time you put into selling them online - most ordinary items won't.
Take the rest of your unwanted items and attempt to sell them through appropriate dealers. Look to used media shops and collectibles dealers for places to unload the remainder of your items.
If there's anything left, make a detailed list of it, take it to Goodwill, and get a receipt. This will help with taxes next year and you can use that tax rebate to help with your debt situation.
6. Automated Payments One way to ensure that you stick to the plan is to set up automatic payments through your credit card company and your bank.
Here's one clever tactic. Set things up so that the credit card companies execute minimum payments automatically from your checking account. Then, set up with your bank a large extra payment each month to the credit card that you're focusing on paying off. This way, you know your minimum payments are always correctly covered, plus you're making a significant extra payment each month on one of your cards, too.
With everything being automatic, you don't have to worry about anything other than making sure there's plenty in your account to cover the transfers, and you can do that by learning how to be frugal with your spending. This plan also ensures no late fees or other unnecessary extra charges that you might accrue.
7. Don't Stop It might be tempting to stop this plan and go back to your old ways once the credit cards are under control.
Don't. Reverting to your old habits will just cause this nightmare scenario to come back.
Instead, once your cards are paid off, start saving that money for your bigger dreams. Set up an automatic transfer with your bank into a savings account or an investing account each week so that you're automatically saving. Eventually, that money can be used to buy a car or help you cover the down payment for a house - a much better outcome than a continuing spiral of credit card debt!