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Tips on Reducing Credit Debt

Reducing credit debt
Find out how much you owe on each credit card and at what APR (annual percentage rate). Then determine which has the lowest APR. If that card has credit remaining and has a balance transfer option, you can transfer the higher APR cards to this card. Though this is a temporary solution which does not reduce your debt, it will save you a lot in terms of interest and annual fees as you would be making just one payment instead of many. Remember that you must close the accounts of the high APR cards once the transfer is done; otherwise you will be transferring credit from one card to another every month and not paying off the debt.

Always pay more than the minimum
If paying the entire balance is not possible, always make a payment that is more than the minimum payment. If you pay only the minimum payment every time you will never finish paying off the debt. This is because the minimum payment is the interest which is due on the principal amount. Try to at least pay double the minimum payment and avoid using the card till full payment is possible.

Budgeting and paying off weekly
Credit cards accumulate interest on a daily basis, so it makes sense to pay off as much as possible as soon as you can. Setting a weekly budget instead of a monthly budget which includes not just your needs (phone bills, house rent, loans, etc) but also your wants (food, entertainment, clothing, etc) gives you the complete picture of where you stand. By including a weekly credit card payment instead of a monthly payment in the budget, you’ll probably be able to afford it. It will also reduce the overall interest on your card.

Deducting against your checking account
Every time you make a credit card purchase, charge the value against your checking account balance at that moment itself. When your checking account balance reaches zero, you’ll know it’s time to stop. As an alternative you could also put the money for each credit card charge into a savings account when you make the purchase. The money in that account can be used to pay the credit card bill when it arrives at the end of the month.

Use your savings account interest
If you have sufficient savings but don’t want to use it to pay the debt, use the monthly interest earned on those savings instead. Knowing the amount of interest you earn on the savings will give you an idea of when you should stop using the credit card.

Income vs. Payments
Mortgage lenders use what’s called the “28/36 rule”. It means your household debt should not be more than 28% of your gross monthly income. Your total debt which includes all payments should not be more than 36% of your gross monthly income. This rule can be used to analyze your debt situation.

Use a debit card instead
A credit card is a “buy now pay later” option, but a debit card is a “buy now pay now” option. Having a debit card will help you to manage your debt finances better as payments made by debit card are charged directly to your bank account unlike credit cards which are unsecured loans and on which you pay interest.

Debt Consolidation
This is an option if your credit card debt is quite large. You could pay off your credit card by taking a debt consolidation loan from a financial institution. The problem here is, since you already have a bad payment record on the credit card and it’s unsecured debt, you are considered a high risk applicant. Therefore in order to obtain the loan you will need to put your property up as security. The danger here is if you are not capable of making the loan payments on time, you face the risk of losing your property.

Non-profit Credit Counseling
These are not the same as debt consolidation loan agencies. They are non-profit organizations that assist you to consolidate or merge your debt and discuss with your creditors for a reduction in the interest rate (50% to even 100%). In return for their services you have to make a payment (weekly or monthly) to them and they will pay your creditors the amounts due. Their services will also ensure that your credit rating will be restored as well. The CCCA (Consumer Counseling Center of America) is just one of the many non-profit organizations which offer these services. It is important to note that this option is favorable for you only if you plan to close your credit card accounts and keep just one card which has a low credit limit.

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