Strategies to pay off that credit card debt once and for all

Strategies to pay off that credit card debt once and for allWhile most of the economic news out there isn't too encouraging, here's something positive to think about: The amount of debt Americans owe on their credit cards is dropping.

In fact, it's at its lowest level in eight years, according to TransUnion, one of the nation's largest credit bureaus. The average amount that people owe on their credit cards is currently $4,951, down from the $5,719 it was a year before. In addition, more borrowers made payments on time in the last quarter compared to the year before.

If you're one of those Americans who has a mountain of credit card debt that you'd like to make into a molehill, this is as good a time as any to rethink or re-tune your debt reduction strategy. Take a look at the following list of tips offered by a few credit experts. We bet you'll find a few tips that will help you pay down your debt faster, even if your funds are limited.

Start with the basics: your budget. It hardly needs to be said, and yet, it should, since not budgeting is probably how a lot of Americans with a ton of credit card debt got into this mess in the first place. The first step is to figure out just how much extra money you have every month that you can use to pay down your credit cards, and start doing it. But don't get overly optimistic, either: If you start impulsively putting more than you can really afford toward your credit card debt, you could wind up getting in even more financial trouble by not holding enough back for your mortgage or rent, your utilities, that unexpected car repair or whatever other expense could crop up during the month.

Pay off the credit card with the highest interest rate first. This is, by far, the approach that most financial experts favor. Say, for instance, that you have five credit cards with minimum payments that add up to $500 a month and $700 you can afford to put toward your credit cards every month. You should sink that extra $200 into the card with the highest interest rate.

While you might be tempted to pay off the card with the smallest balance --just to get it over with -- it's not the smartest strategy to adopt. (Of course, if you feel like you just have to, say, pay off a Mastercard with a small balance of $500 on it rather than sink that extra $200 into a Visa with $9,000 on it, go ahead and do it and feel good about it.)

But as Casey Mervine, a financial consultant at Schwab's Torrance, Calif., branch, told me, "While there any number of avenues to the finish line, your total out-of-pocket cost is likely to be more if you're not focusing on the highest interest credit card first. You want to get rid of the card that's the most cancerous, and that higher-interest rate one can really be a death spiral for people who are in debt."

Yeah, tell me about it.

As I've mentioned many times on WalletPop, in 2008, after fighting and losing a 15 year battle against credit card debt, I was one of a million people in the United States who declared bankruptcy. I didn't adopt a strategy of paying down the cards with the highest interest rate first. I usually put more money toward the card that had the lowest balance and frequently paid down whatever card seemed to be causing me the most stress at the time.

But every expert I've encountered seems to say the same thing: If you have multiple credit cards that have a collective debt on them that threatens to bring your finances tumbling down, go after the card with the highest interest rate. Don't ignore those other cards, obviously -- assuming you can, you should pay the monthly minimum and on time. But all your extra credit card money should be targeted at the card with the highest interest rate rather than spreading your money out across all the cards.

That's certainly the plan Mervine suggests. And it's the plan endorsed by Sheri Flanigan-Vazquez, COO of Justine PETERSEN, a nonprofit credit building and microlending organization headquartered in St. Louis. It's also the counsel of Barbara Stark, who runs the nonprofit organization, American Debt Counseling. And it's what Ornella Grosz, author of the upcoming book, Moneylicious: A Financial Clue for Generation Y, suggests. It's also what Kevin Gallegos, vice-president of Freedom Debt Relief, a debt settlement company in Tempe, Ariz.., counsels. In fact, I have yet to encounter a financial expert who says not to chase the high-interest rate credit card first.

Once you're done paying off that high-interest card, every expert I spoke with stressed the importance of continuing the strategy -- paying off the next-highest-interest rate card -- until you've paid off your debt. "This strategy," says Grosz, "has a snowball effect."

Or you could pay off the credit card with the lowest balance first. I know it sounds as if we're offering conflicting advice, but we're not. While the "highest interest rate" approach is best, as Grosz notes, "Getting rid of the smallest balance first has its own psychological payoff. It gives you the feeling of 'one down and two more to go till touchdown.' "

So if that's what you have to do to feel better about getting on top of your debt, do it and don't worry about it. After all, psychology plays quite a prominent role in credit card debt -- from how you manage not just your money but how high your stress levels get when you look at all your credit card statements. Killing off the credit card with the lowest balance means you'll free up more money that can go towards your other credit cards.

Chellie Campbell, a financial stress reduction coach in Los Angeles, told me that while her first recommendation is always to put the most money into the credit card with the highest interest rate, she makes an exception when clients have one or two credit cards with balances "much smaller than the others." In that case, she advises, "Move those cards to the top of the list. You'll pay them off first, and you'll feel successful that you accomplished this goal. That helps spur you on to pay off the next one."

Resist the temptation to transfer the balance of one credit card to another.
According to Flanigan-Vasquez, "It always seems like a good idea at the time, but once the funds are transferred, the introductory interest rate generally doesn't last long, and then it can balloon to a rate higher than your previous card. It might work, but I've seen a lot of people get in trouble with that."

Use a debt calculators to determine how bad -- or not so bad -- your situation really is. Obviously, this is your war, and you might feel like you have a better handle on your situation than most, but no matter how you handle your debt, you'd be smart to use a debt calculator to see how fast or slow your debt will be killed off, depending on what and how you pay.

And if you're really struggling, there are some sites out there that go beyond what a debt calculator will do, like DebtGoal, which will create a customized debt reduction plan for you to help you pay off those credit card debts. There's a $15 monthly fee, which may seem counter-intuitive to some (Pay money to get rid of my financial pain? And for something I can do on my own?), but for people who are truly in over their heads and feel like they're wasting far more than $15 a month because they just can't figure out how to get rid of their credit card debt, it may be worth trying.

As Mervine observes, "The main thing is to really focus your attention on what's going to offer you the biggest benefit. You kill off that debt first, and then you move to the next one." It may take awhile, but those dollar numbers will go down, a feeling -- to borrow from a well-known credit card commercial -- that is priceless.

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.

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