Managing Credit Card Debt

American households have an average of over $10,000 in credit card debt, at interest rates averaging above 16%. If you have credit card debt and only make the minimum payments each month, your purchases can cost you nearly twice the retail price by the time you finish paying off your purchases if you only make minimum payments.

Why You Should Manage Credit Card Debt

If you have $8,000 in credit card debt with an interest rate of 18%, it will take you 30 years to pay off the debt if you only make minimum payments each month. When all is said and done, you will pay over $11,000 for that $8,000 debt, and that's assuming you don't charge any more purchases to the card. Paying off your credit cards is one of the best "investments" you can make. It doesn't make sense to carry debt at a 16% annual interest rate when the money you make on savings is close to 0%, and even savvy stock traders rarely clear a 10% return on investment.

Techniques for Cutting Credit Card Debt

Here are a few ways to trim your credit card debt:

• Put the cards away and stop using them
• Always pay more than the minimum required payments if you are able
• Consider consolidating credit card balances onto a 0% balance transfer card
• Ask credit card issuers to lower your interest rate. If you've made payments on time and have a good track record, they just might do it.
• If you've been overpaying your mortgage, consider putting the extra money you've been paying on your mortgage toward your credit card debt instead. Mortgages have far lower interest rates than credit cards, and most of that interest is tax deductable.

What Not to Do

While it's fine to cut up your credit cards so you don't use them, it's not wise to close out your credit card accounts, particularly if you've had them for several years. One factor in your credit score is how long you have had credit accounts. If you cancel an account you've had for 15 years, you can harm your credit score. Never borrow from your 401K to pay off credit cards either. While borrowing from home equity was popular when housing prices were rising rapidly, it is too risky. Home equity loans are secured by your home, and if you default, you could lose your house.

When to Get Help

If you're struggling to make minimum monthly payments on your credit card debt, it's time to act. Consider enlisting the help of a credit counselor to help you manage your debt. Before signing on with a credit counseling agency, do your homework:

• Find out if the agency is for-profit or non-profit and if they are licensed in your state (though some states don't require licensing)
• Check with your state's attorney general to find out if there have been complaints about the agency
• Contact the local Better Business Bureau to see if they have received complaints
• Beware of agencies that try to push you into a debt management program without finding out the specifics of your situation first.

Don't wait to address problems with credit card debt. It will only get worse if you ignore it.

Sources:

http://www.npr.org/templates/story/story.php?storyId=87892604
http://www.fool.com/how-to-invest/personal-finance/credit/index.aspx
http://financialplan.about.com/od/creditdebtmanagement/a/How-Not-to-Pay-Off-Debt.htm
http://money.cnn.com/magazines/moneymag/money101/lesson9/index.htm
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm