Know What You Are Spending
The first step in paying down your credit card debt is to keep it from increasing. This involves taking a gaze at what you are charging to your credit cards. Examine your credit card statements carefully. Do an analysis over the past several months, summarizing the types of charges you are making. This can often be an enlightening employ. You could prepare a statement of your total charges by month, broken down into categories.
Essential vs. Discretionary Spending
Break down your credit card charges between what you consider essential expenses and those that are more discretionary. This type of analysis can be relative – what you consider essential during good times could become more discretionary during hard times, in terms of the type of expense and the amount. Your essential expenses are what you need to spend for maintaining your home, eating, clothing, health care, necessary expenses for your work such as commuting and meals, and your children’s school expenses. Discretionary expenses include eating out, recreation and entertainment, and purchases of non-essential, or luxury goods.
Cash Expenses
In order to know what you are spending in cash, you need to keep a record. This can be simply a note that you make every time you pay something in cash, whether for gas, coffee, vending machines, a newspaper, taxi, bus or train fare, a tip, a donation, and small purchases at the grocery store or drug store. Keep your notes every day for a month or so, and summarize all your cash expenses at the waste of the month, summarizing all your expenses by category. It can be surprising how cash expenses add up, without being aware of them.
Prepare a Budget
If you do not already have a personal and household budget, you should do one. The analysis you make of your credit card charges and your cash expenses can assist as a good reference. You should also seek information from your bank account to identify all the expenses you pay by check, debit card, or bank transfer. Once you know how noteworthy you are spending and what you are spending it on, you can more easily prepare a budget. The budget should include all your important expenses, and you should take a hard look at your discretionary spending. You may not necessarily have to eliminate all your discretionary spending, but if you set a reasonable amount for these items in your budget you will be in a better position to control them. Your budget should also include a reasonable amount for unforeseen costs, such as repairs and medical expenses.
You can do your budget by hand on a sheet of paper, on a spreadsheet on your computer, or you could use personal finance software, such as Quicken, Microsoft Money, AceMoney, or various others. You can find reviews of the different personal finance software on websites such as http://personal-finance-software-review.toptenreviews.com. What is important is to formalize your budget and make it a part of your personal financial planning. You should keep your budget in a format that allows you to compare actual expenses with budgeted expenses month by month, to behold where you are over or under spending.
When you do your first draft of a budget and find that your expenses are more than your income, you have a deficit. This may be why your credit card debt has been accumulating. You need to balance your budget, either by increasing your income, reducing your expenses, or both, depending on the amount of the deficit. You may need to mediate taking on a part-time job, doing jobs on your own where you could earn some extra income, or look for a better paying permanent job. If you are in business for yourself, you can look for opportunities to expand your sales by doing advertising, developing new products and providing additional services, and reaching out to new markets.
You can reduce your spending on non-essential items by eating at home inside of going out to eat, putting off purchases of items you do not need, saving on energy by following favorite tips for energy efficiency in your home, limiting the trips you make in your car by walking when possible or combining trips, and cutting back on cable TV service for channels you seldom or never watch. You should not overlook minor amounts – small expenditures add up and can represent an opportunity to use that money to pay down debt instead.
Paying Off Debt with Debt
You would be better off if you could pay down the credit cards with the highest interest rate first. When you have several cards and you have to pay something on each one, try to pay a little more on the cards with the highest interest rate.
Consolidating credit card debt may make sense if you are transferring debt from a credit card with a higher interest rate to another card with a lower interest rate. If you take out a loan to consolidate credit card debt you should carefully review the conditions, including the interest rate, the term of the loan, the monthly payments, and any prepayment penalties.
You should be especially careful about taking out a home equity loan to pay credit card debt. You are putting your home at risk, and when you use the proceeds of a home equity loan or line of credit for purposes other than purchasing or renovating your home, in the event of foreclosure you could be subject to income tax on the portion of the debt cancellation that corresponds to this other spend of a home equity loan.
Savings and Retirement
Unless you face a crisis situation, you should not tap into your savings or draw money from your retirement account. You will need that money when you retire, and there is a tax penalty of 10% for early withdrawals from a 401(k) plan. You should pursue all other possible alternatives before using your savings and retirement funds.
Be Consistent and Perseverant
You should do a budget with the intention of following it; therefore the budget should be strict, but also realistic. When you find you are continually going over the budget, you may be tempted to discard it. It would be better to occupy another look at the budget, to see whether it really represents all your essential expenses and a reasonable allotment for discretionary spending, or whether you need to be more rigorous in controlling your spending.
Pay more than the minimum payment on your credit cards each month. Pay as much as you reasonably can, and be consistent in doing so every month. In effect, in order to reduce your credit card debt, you need to pay back more than you charge on the cards each month. If one month you have some unexpected expenses and cannot pay as much as you would have liked on your credit card debt, try to make up for the difference in subsequent months. The important thing is to keep chipping away at your credit card balances. It may take a while, but over the long run you can pay down your debt by using the information you have gathered regarding your expenses, following your budget, and consistently paying as much as you can.
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