James R. Balmforth: How to Pay Off High Interest Credit Card Debt

Perhaps like many Americans your New Year’s resolution involves paying down credit card debt. After all, even the most ardent supporter of the plastic hears that little voice in the back of their head “credit card interest rates are a huge ripoff, I shouldn’t use my Visa card as much as I do.” To be sure, if you’re trying to get your financial life in order, taming high interest credit card debt is job number one. Unfortunately, many consumers get caught in the minimum monthly payment trap, leaving stagnant balances that seem to never go away. So how do you go about paying down credit card debt and getting rid of Mr. Visa once and for all?

Damage Assessment

The first step to paying off your credit card debt is to figure out the exact amount that you currently owe. It’s not until you have exact balances and the interest rates you’re being charged that you’ll know how high of a mountain you’re faced with climbing. In addition to outstanding balances, add up the monthly payment for each card and figure out how much of your income is going to credit card payments every month. Organization is key. We’ve created a simple chart to help you organize what you owe.

Break Your Dependence on Credit Cards

In other words, stop using the credit cards! The idea in starting a plan to pay down credit card debt is to attack the principal balances rather than just paying interest every month. The credit card companies want you stuck in debt, feeding them their interest every month. The only way to stop interest from increasing is to stop the balances from increasing. Put together a budget and stick to it, without using your credit cards. Often, aggressive budgeting is the fastest way out of debt. It might hurt at first, but the sense of satisfaction you’ll receive from paying off your credit card debt will far outweigh any temporary inconvenience. If you absolutely need credit cards to live, it might be time to consider filing for bankruptcy.

Pay Off One of the Cards

To gain momentum in your quest out of credit card debt, pay off the smallest card first. Completely retire one of the balances, it feels good. Some will argue that tackling the highest balances first makes sense, but momentum will play a big role in getting you out of credit card debt. Get rid of the smallest card and the rest will start to fall in line.

Pay More Than the Minimum Monthly Payment

Salt Lake City bankruptcy attorney wrote an excellent post on the National Bankruptcy Forum describing the major problems consumers face when they try to pay just the minimum on a credit card. He listed a table showing how long it takes to pay off small debts at low interest rates which we’ve included here:

$1000 balance, 18% interest, minimum payment $100 = 11 months to payoff $1000 balance, 18% interest, minimum payment $50 = 24 months to payoff $2000 balance, 18% interest, minimum payment $100 = 24 months to payoff $2000 balance, 18% interest, minimum payment $50 = 62 months to payoff $3000 balance, 18% interest, minimum payment $150 = 24 months to payoff $3000 balance, 18% interest, minimum payment $100 = 40 months to payoff $4000 balance, 18% interest, minimum payment $200 = 24 months to payoff $4000 balance, 18% interest, minimum payment $150 = 34 months to payoff $5000 balance, 18% interest, minimum payment $200 = 32 months to payoff $5000 balance, 18% interest, minimum payment $150 = 47 months to payoff $5000 balance, 18% interest, minimum payment $100 = 93 months to payoff

As John points out in his article, these figures don’t even factor in administrative or late fees which can add up quickly! The bottom line is that minimum monthly payments on credit cards usually represent interest only, the underlying balances aren’t touched by making these payments. To actually get out of credit card debt it will be crucial to pay more than the minimum monthly payment, there’s simply no other way.

Transfer Debt to Lower Interest Cards

As the table above demonstrates, the credit card companies kill you with high interest rates. As we’ve established, if you’re trying to get out of debt, paying the minimum won’t do. Instead, try transferring balances from one lower interest card to another, and keep doing it as opportunities arise. Many banks offer promotional “teaser” rates to induce consumers to open a line of credit. If you pay enough attention to deadlines, you can move your credit card balances around to banks offering the lowest rate, this will cut down on some of the money you’re throwing away on interest.

Negotiate With The Bank

Many lenders are open to settling past-due credit card bills for less than the full amount owed and a good consumer attorney can aid in negotiating with your credit card lender as a way to avoid bankruptcy. How is this possible? Once a loan goes into default for long enough, lenders no longer carry it on their books as a performing asset. In cases where a consumer has fallen behind for many months, recovering anything at all may be considered gravy by the credit card lender. This doesn’t mean your lender will be a push over, they’ll likely ask that you produce financial information as part of the negotiation process, but to the extent you have some cash to throw at the problem, you might be able to get out of debt for far less than what you owe. In these cases, the amount of debt forgiven will be taxed as income come April. For more information, see: Tax Consequences of Forgiven Debt.

Know When to Look for Help

If you fallen behind on your credit card bills or need credit cards to purchase basic necessities such as groceries and gas, it may be wise to meet with a bankruptcy attorney. Although options outside of bankruptcy should always be explored, filing for bankruptcy protection will eliminate credit card debt as well as medical bills.

Free Consultation with Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.