Credit Card Debt Reduction Basics
by Mr Credit CardI got this letter from a reader.
Qn : Hey Mr Credit Card – I have 5 credit cards with $25,000 debt on all of them. I have been paying my bills on time and my fico score is still good. But my debt is too high for my liking and I would like to get rid of my credit card debt. I’ve heard that getting a debt consolidation loan or a home equity line of credit will reduce my monthly interest payment. What is your opinion on this matter? – Julie.
Ans : Julie – Since you have a good credit score, I would not get a home equity line of credit (HELOC) even though you may “save” a little on your monthly interest cost. The reason is because any HELOC is a secured debt just like your mortgage. If you miss on your payments, you may face foreclosure. In contrast, your credit card debt is unsecured debt. If you default on your credit card payment, the credit card company cannot force you to sell your house. Your credit will take a hit, but your house can never be foreclosed.
Here are the steps I would take to reduce credit card debt.
1. Instead, I would recommend applying for a 0% apr balance transfer credit card and transfer the balance from the card with the highest apr. I recently wrote a post on How to choose a balance transfer credit to help reduce your credit card debt, which you should check out.
2. List the credit cards from the highest apr to the lowest (the 0% card will be the lowest). Your goal should be to eliminate the debt from your highest interest rate credit card first, and then moving on to the next highest apr card until you have completely eliminated your credit card debt.
3. Document and write down the minimum payment you will pay for all credit cards. Set that amount now and pay that amount every month for all credit cards. Over time, you will be paying higher than the minimum requirements every month because you will be reducing your principal.
4. Take the savings from you get from the balance that you transferred to the 0% balance transfer card and use that extra savings to pay off the card with the highest apr card.
5. Once, you pay off the card with the highest apr, use the extra money that would have been used for the payment to that card and increase your payment on the next highest apr credit card.
6. Wash, rinse and repeat the process.
Other things to take note of
You also want to consider these other points. Firstly, use your lowest apr credit card to charge your daily expense. Pay off that amount every month. Do not use your 0% balance transfer credit card because you should be transferring a balance up to the maximum credit limit for that card.
Secondly, make sure you pay your bills on time (especially for your new 0% apr credit card) because your apr will increase to the default rate should you miss your payment. With universal default clause, your apr on ALL your credit cards may increase if you miss even one payment on any debt obligations.
Thirdly, you can reduce your credit card debt faster if you set a budget and reduce your monthly expense. Look for ways you can save money. For example, consider getting a VOIP phone provider rather relying on your traditional phone carrier. Consider getting Vonage as they are the largest VOIP provider and is much cheaper than traditional phone plans (I personally use vonage and would recommend it). Consider getting coupons from coupon sites to get discounts on your purchases.
I do not know the rates on all your credit cards so we cannot calculate how fast you can eliminate your credit card debt. But if you stick to this strategy, you will get rid of your credit card debt before you know it.
January 2nd, 2007 at 14:08
[...] Mr. Credit Card with debt reduction basics. [...]
January 2nd, 2007 at 18:16
I agree on all points, but I would recommend paying off the card with the lowest balances first (unless the highest APR is extremely hi — anything over 15%), especially if you can pay it off in one or two payments. It provides a psychological boost and it allows you to “snowball” your payments faster. This would be helpful if the card with the lowest balance has a promotional APR that’s going to jump sky high at the end of promotion. Just my two cents!
January 5th, 2007 at 06:57
[...] The No Credit Needed Network published the first carnival of debt reduction for 2007. My post on Credit Card debt Reduction Basics was posted in this carnival. [...]
January 11th, 2007 at 17:11
If you are like most people, you have been hearing about the importance of a good credit report since you were able to hold a dollar inyour hands. One of the best things that you can do for yourself is to keep a good watch on everything that has to do with your credit.
I have a good read to share with you on
How To Quickly Increase Your Credit Score In One Day
I hope you’ll find it useful have a great day!
February 14th, 2007 at 17:54
[...] This guest article comes from Mr Credit Card who has a blog all about credit cards at Ask Mr Credit Card. If you like this article, you may want to check out his article on credit card debt reduction basics or his article on 0% Apr Balance Transfer Credit Cards. [...]
April 15th, 2007 at 13:38
Thank you Mr Credit card for the information. Looks like I’m on the right track. The one thing I would add to this is use bill pay. At my bank it is free so I send smaller weekly amounts and once a month overpay the amount due. It really adds up and doesn’t hurt the pocket book. I really never miss it and I would probably be spending it on other things that don’t matter.
May 8th, 2007 at 00:26
Many people see these balance transfers as nice ways to end up paying down their debt. However the only issue is the reason you did a transfer was because of the rate you were being charged. There is nothing that can stop the fact that your rate may very well go right back to where it was or higher once you made the transfer. Seeing that all credit cards employ the universal default clause nowadays, if you go late just once again you will find yourself with a high rate all over again.
June 15th, 2007 at 20:34
Another piece of advice is to avoid taking a home equity loan (debt consolidation loan). Essentially you are not reducing your debt but rather transfering it from a unsecured debt into a secured debt with your home. Now you will have two mortgages, plus the trap is set up for you to mess up all over again. You will still have your cards with high credit limits ready for you to fall in the same trap, but now you have two mortgages and next time will have to file bankruptcy and potentially lose your home. I have spoken with many people who have had just that happen to them. It is very unfortunate.
June 23rd, 2008 at 20:37
Hm, I have a different opinion on this subjet. I see that almost everybody not agree that home equity loan is a good solution. Well, Im in real estate business and can say you the following: home equity loan is one of the best credit resources, that I personally use. Why? And why its better than 0% credit card? Check it out:
First of all, on the top of this story, the moderator says, that “In case of failing for a mortgage payment, you will be forced to sell your home”. Well, yeah! But not on the first fail. You will need to fail at least (!) three times and really spoil relationships with your lender. Because they are not interested in hiring executor to take care of your mortgage, because they will have to pay him, rush with a sale (time is money) and I can tell you for sure: its the LAST thing, when your lender will force you to sell your house.
Why its better than 0% credit card? Consider the following: if you have already several credit cards, with new credit card maximum limit you can get is probably 7000. You will use it up to 100%, but still with the rest 18000 you will continue to pay high interest. (Im not even talking about your credit score decrease in case of 100% spending limit). But in case with second mortgage, your credit will be secured and you can get a VERY good deal with it, like 7% or something.
So, my advice is to get 0% credit card, transfer a part of your debt there, and use equity loan. Its not that bad that people say.
And of course, control your spending habits to pay off the part of the debt from card and second loan.
Thanks.
September 16th, 2008 at 08:53
I don’t have any delinquent cards. In fact, my credit score is about 680. I simply have too many credit cards and would like to pay them off before any trouble arises being the economy is what it is.
I would like to achieve a higher credit score, pay lower apr’s and reduce my monthyly payments on those credit cards.
Can I reduce my apr’s by simply calling the creditor and asking them to lower my apr? If they refuse to; should I threaten to close the account? I ask about the threat process because that is usually when they take you serious and then pass you along to management with authority to negotiate.
I can follow through on account closure threat up to about $5,000. I have some accounts with 26.9% APR and a max credit line of $1,000. My highest major credit card line is $7,000 and the APR is 14.9%. My current balance is about $4,500. All the other cards are $1,000 less with higher APR’s.
I am willing to pay off up to $5,000 in debt on the higher interest cards but I would rather negotiate lower APR’s, get the payments reduced and then pay them off. Is that possible with the threat process? Where do I start? How should I professionally and seriously approach the creditor?