Small Steps To Reduce Credit Card Debt

Start right now

• Take stock of your situation. Don’t be afraid to look your bills “in the face” and make a list of what you actually owe. Being willing to analyze your situation objectively will make it possible to resolve the problem. Knowledge is power!

• Take this simple quiz to see if you’ve got too much debt. If you answer any of the questions “Yes”, you may be getting into financial trouble:
• Next month's bills are due before you've paid last month’s.
• There are more bills than you thought.
• You know what past-due notices look like.
• You get an overdue balance on a credit card statement.
• You avoid opening statements.
• You rarely keep a running balance in your checkbook.

• If you can, quit using your credit cards: Instead, use a debit card so the payment comes straight out of your bank account

• Give yourself some credit. If credit card debt has been a problem in the past, don’t cut up your cards, simply use them wisely this year. (Would you get rid of the stove because you burned the bacon? No, you’d just be more careful when you cooked in the future.) Track your credit card purchases as you make them, or use a debit card so the purchase amount is automatically deducted from your checking account.
  
  
• If you must continue using your credit cards for now, charge only what you can pay in full within 30 days, when the bill comes.

• Put the money for each charge you make into a savings account as you make the purchase. That separate account will be used to pay the bill when it comes. As an alternative, deduct each charge slip from your checking account balance as you make the charge. Where you would normally write in the check number, put “CC” for “credit card.” When your checking account balance reaches zero, quit charging.

• Figure out the ratio between your monthly payment on debt and your monthly income. Here's a rule that is used by mortgage lenders - the "28/36 rule." Your monthly household debt service should not exceed 28% of your gross monthly income. Your total debt service, including your house payments plus all other payments, should not exceed 36% of your gross monthly income. 

• Sign up for the free Money Club Makeover, 21 Days to Get Out of Debt.

Get off the credit card treadmill

• Freeze your debt. If you’re trying to tighten your belt, consider putting your credit cards out of service temporarily. Simply place your card in the middle of a container full of ice cubes, putting a few cubes on top to keep the card from floating to the surface. Fill the container with water, and put it in the freezer. In order to use your credit card again, you’ll have to wait for it to defrost, which will give you a “cooling off” period to consider your expenditures.  

• Save, don’t charge. If you want to make a large purchase, try saving monthly for it until you can pay for it in cash. It's much cheaper to save for an item first than to buy it on credit. Keep your future debt load reasonable.

• Before you run up credit card debt, have a plan for paying it off. Remember that your debt SPENDS your future income. Will you be able to curtail future spending so you can pay for the item’s you’ve already bought?

• When the bill comes each month, if possible, pay all the current charges plus the monthly finance charge. In addition, pay 5 to 10 percent of the old balance due, as much as you can afford.

Be wise about credit cards

• Pay attention to interest rates. Don’t throw those credit card solicitations out without looking for cards that have a lower interest rate than your current debt. If you find a good offer, transferring your debt can save you a bundle. You can also check out www.bankrate.com to find the lowest available offers and submit your applications.
  
  
• Order a copy of your credit report, and that of your spouse, and sit down together to review them. If there are any inaccuracies or inconsistencies, decide which of you will take steps to correct the problems. Don’t put it off—it will only get worse, not better.
  
  
• Shop for the lowest interest rate if you expect to carry a balance from month to month. However, if you plan to keep your balance small, look for a no-annual-fee card with the lowest interest rate you can find.

• Make sure the credit or debit card you carry has a zero liability policy. Although payment card fraud is extremely rare, many of the card associations enhance federal security protections with a zero liability policy. The zero liability policy provides added protection to consumers by eliminating liability, in most circumstances, of consumer payment card fraud. Without the zero liability policy, under federal regulations, consumers may be held liable for up to $500 or more.

• Plan ahead. If you are planning a big purchase, such as furniture, look for a credit card offering a low introductory rate if you are certain you will pay off the balance and are comfortable with the terms. Opening a credit account with the furniture store is another option, but credit cards issued by financial institutions usually have lower rates than store cards.
  
  
• If you’re drowning in debt, get help! Contact Consumer Credit Counseling Services at www.cccs.org, or the National Foundation for Consumer Credit at www.nfcc.org.
  
  
• Watch out for credit card bill consolidation companies—most of them are not worth the fees.
  
  
• If you might get laid off, apply for credit cards now. The best time to get a credit card is while you are employed, and if you do lose your job, the available credit can help you with emergencies and help tide you over until you can find new employment.
  
  
• Use your card to bridge the gap. If you are expecting a bonus in a few months, but want to make a big purchase now, you can put the purchase on your credit card and pay it off when your bonus comes. That's a good plan if: (1) you're sure the bonus will come; (2) you limit your spending to the amount of the net bonus after tax (don't treat it like an endless supply of money); (3) you've found a card with a credit limit high enough to accommodate the purchase and with a reasonable interest rate over the period of time you'll need to pay off the balance.

• Be smart about when to use your debit card and when to use your credit card. A credit card is a "buy-now, pay-later" tool. A debit card is a "buy-now, pay-now" tool. Both cards can play major roles in your money-management plan.

• If you have trouble getting a credit card, get a debit card instead. Because debit cards use your own money at the time of sale, they are often easier than credit cards to obtain.

• Check your bank account. Before you use your debit card, be sure there’s sufficient funds in your bank account to pay for the purchase. A debit card is linked to your checking and/or savings accounts. When you use a debit card, money is subtracted from your account. In contrast, a credit card is an unsecured loan that you will have to repay with interest at a later date.

• Go for convenience and safety when you shop. A debit card allows you to shop without having to carry cash or remember your checkbook.

• Use your debit card when you surf the net. If you like to shop the Internet, you can’t write a check, so use your debit card. Even in many bricks-and-mortar store, debit cards are more widely accepted than checks, especially when you travel.

• Pay attention. Debit cards and credit cards look a lot alike, so know which card you are using. There is no grace period for a debit card purchase. Since it's directly deducted from your checking account, make sure you have the money available to cover the full transaction amount at the time of sale.

• Shop carefully for debit cards. Some debit cards have monthly or per-transaction fees. Carefully review your cardholder agreement. Your issuer is legally required to disclose any fees you will be charged for card use.

• If your debit card is lost or stolen contact your card issuer immediately. Not only does this reduce your liability if fraud losses occur, but if it’s a VISA card you can get your credit restored faster. A VISA cardholder will receive provisional credit within five business days of notification of the unauthorized use of their debit card. This exceeds the federal guidelines of 10 days. Many financial institutions, however, often provide credit within 24 to 48 hours. Under federal regulations, financial institutions have up to ten days to provide provisional credit.