If you're like most Americans, you've got some amount of consumer debt. Instead of just wishing it would go away, take action and get it under control by coming up with a plan to pay it off. Trying to pay down debt without one is like going on a trip without a map. You may reach your destination eventually – but it will take longer to get there and you'll undoubtedly get frustrated along the way. A spreadsheet and a plan can make debt management a lot easier.
Don't Take on New Debt
You can't get out of a hole if you continue to dig. Stop all unnecessary spending and retire your credit cards until you can pay them off. Don't take on any new loans either (if your car breaks down, repair it). From now until your credit cards are paid in full, you should only be using cash for what you need.
Cut up all your credit cards except for one to keep for emergencies, and leave it out of your wallet to avoid temptations. Don't close the accounts entirely – that could impact your credit score negatively. Avoid putting it on ice as well, which could damage the magnetic strip.
Lower Your Rates
If you have a good FICO score (720 or higher) you may be able to qualify for lower credit card rates. Make sure you call all your lenders to request one. Sometimes it's as simple as making a phone call. Here's a sample script:
“Hello, this is (Your Name). I've been a good customer and have been getting offers in the mail from other credit card companies with lower APRs. I would like a lower rate, otherwise I will cancel my account with you and get another card. Is there anything you can do to help me out?”
More than half the time, customers who call end up with lower rates. If you don't get the answer you want the first time you call, try another day. If that still doesn't work, you may be tempted to shop around for a new card. This should only be done with extreme care and with full knowledge of possible pitfalls such as:
• Balance transfer fees
• Short introductory period low APRs
• Transferring too often can lower your credit score
• Low credit limits can lower your credit score
• Be wary of the Universal Default clause which states that if you are late in paying any bill, your APR on an unrelated card could rise
As always, read the fine print. In the end, the hassle, fees, and uncertainly of transferring balances often isn't worth it.
Create a Debt Spreadsheet
Collect all your current credit card statements and other bills in which you carry a balance. Create a spreadsheet (Excel works well) so that you can track your progress as you pay down your debt. Here is a sample of how to set up your spreadsheet:
Column A: Number Your Credit Cards
Column B: Name of the Creditor/Account
Column C: Interest Rate
Column D: Balance Remaining
Column E: Minimum Monthly Payment
Column F: Budgeted Monthly Payment
Add the totals in columns D, E. You'll then have a clear picture of your total amount of debt and the minimum amount required to stay current with your payments. After you've created a household budget, you'll know how much you can aim to pay on each card for a debt repayment plan that works for you (column F). However, it will be your goal to put as much extra money as possible towards your monthly debt payments.
Here is a tool you can use to create your debt spreadsheet:
Create a Paydown Plan
Now that you have a debt spreadsheet, you should have a clear picture of what you're dealing with. Do you have accounts that are past due? Make it a top priority to get these bills current. Are there any bills with exceedingly high rates? Those should be a top priority as well.
But, after the obvious, which debt should you tackle next? There's no question that paying off your highest interest debt first makes more sense mathematically. At the end of the day, this method will always result in more money in the bank (Click here for additional reading). However, if you are the type that craves instant gratification (which could be why you're in debt in the first place) the Snowball Method may be more psychologically rewarding. It's up to you to decide which method makes the most sense given your own situation and level of motivation.
Here's how they work:
· Rank debts in order from the lowest balance to highest
· Make minimum payments on all your debt with the exception of the debt with the lowest balance
· Put any extra money towards the debt with the lowest balance until it has been paid in full
· Repeat the process by always applying extra money to the next debt with the lowest balance
· Rank debts in order from the highest interest rate to lowest
· Make minimum payments on all your debt with the exception of the debt with the highest interest rate
· Put any extra money towards the debt with the highest interest rate until it has been paid in full
· Repeat the process by always applying extra money to the next debt with the highest rate