Four steps to paying down your debt once and for all
Dollars & Sense
According to the National Foundation for Credit Counseling, the top financial new years resolution for many consumers in 2014 is cutting back on debt. Now that the year is underway, how many people have kept that pledge? If your resolve is starting to fail, the Oregon Society of CPAs offers these tips for making it happen.
Get the big picture
Begin by adding up all your outstanding consumer debt. You may be in for a pleasant surprise, if you come up with what seems like a reasonable number, or in for a rude awakening, if the total is larger than you expected. In either case, before you can create a plan to eliminate debt you must know how much youve got. What you find may change how much money you want to pay off each month and how long you can realistically expect your efforts to take.
Cut the cards
Now that you know how much you owe, you must take one important step to prevent adding to that amount: Stop using your credit cards. Lowering your existing balances wont help you if you are only adding to them each month. If doing away with plastic altogether is not possible, budget yourself a specific amount that you can spend on credit monthly and stick to it. Then keep track of everything you spend so that you are sure to stay within your budget.
Attack the highest rates first
As a general rule, its best to begin by paying off the debts with the highest interest rates because carrying those balances is costing you the most each month. If youre not sure how much interest you are being charged on each credit balance, check your monthly statement or contact the credit card issuer or lender for more information. If you have a strong payment record, this may also be a good time to try to negotiate a lower rate with all of your credit card companies.
Pay above the minimum
The longer it takes you to get rid of debt, the more time you will spend paying interest on it. For example, if you have a $3,000 balance at an 18 percent interest rate and pay only a minimum $60 each month, it will take you 26 years to erase that debt. In the meantime, you will end up handing over a total of $6,863 in interest in addition to paying off the original $3,000 debt. Raising your payment to just $100 every month allows you to wipe out your debt in about three and a half years and slashes your total interest to $1,016. Thats why you should always attempt to pay more than the minimum due on any account.
You may have even noticed some helpful incentives for paying off your amounts right on your monthly statement. Legislation passed a couple of years ago requires credit card issuers to disclose how long it will take consumers to pay off their balance if they only send in the minimum amount due each month. In most cases, it can be sobering to realize how many months or years you will spend paying interest on your outstanding balances. In fact, 25 percent of consumers said that seeing those numbers made them pay more each month, according to the National Foundation for Credit Counseling.
Dollars & Sense is a column provided by the Oregon Society of CPAs