3 Steps to Eliminate Credit Card Debt
When it comes to debt, it can be debated whether there is such a thing as “good debt” and/or “bad debt.” For example, some financial planning experts would say that home mortgages and home equity loans might be considered to be good debt because debt may be tax-deductible.
But there are very few experts who would say that credit card debt is good. This is primarily because in most instances, credit cards feature relatively high interest rates. The current national average interest rate for credit cards is over 15%. Therefore, many financial planning experts recommend paying down and eventually eliminating credit card debt as a core personal financial planning strategy.
A Three-Step Plan to Get Rid of Credit Card Debt
Paying off credit card debt usually requires a certain amount of discipline, as well as a concrete plan. Consider these three steps for getting out of credit card debt:
1. No New Purchases
Commit yourself to paying cash for all future purchases or using a debit card. If necessary, shred your credit cards.
2. Set priorities
If you have multiple cards with balances, prioritize. There are two schools of thought here. One is to concentrate on paying off the card with the highest interest rate first, and then move on to the next highest-rate card, etc. The other is to concentrate on the card with the lowest balance first, and then move on to the next lowest balance, etc.
The first strategy will likely result in you’re saving more on interest. However, the second strategy may provide a psychological boost. Paying off a card in full can be very encouraging and can help motivate you to stick with your overall debt reduction plan.
3. Set Goals and Milestones
Determine to pay off all of your credit card debt by a certain date. Make the goal realistic—the sooner the better, of course, but if your goal isn’t realistic, you may become discouraged if you don’t achieve it.
The Next Step
Once your credit card debt is paid off, consider depositing the money you were putting toward paying off the debt into a savings account, so you can pay for future financial emergencies in cash instead of charging them. Then, once you’ve built up an adequate emergency fund, consider investing a portion of the money in a retirement plan.
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