Consolidating Credit Card Debt

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Consolidating credit card debt by wisely using credit card cash advances is one approach to help with paying off credit card debt.

If this debt is keeping you from saving for retirement, it is especially urgent that you tackle it.

Follow these steps and examples to make the most of those balance transfer offers as a way to reduce and eventually eliminate your debt.

Continued from: Paying off credit card debt

On the previous page, you analyzed your budget and got a better understanding of how credit card debt can become a debt trap.

Now we will consider how to use your credit cards to reduce the debt and minimize the interest you pay, and to cancel as much debt from your monthly payments as possible.

Points to remember:

Rule #1: NEVER use retirement savings to pay off credit card debt.

You must eliminate credit card debt and get control of your spending if you hope to have a comfortable retirement and enjoy life.

You may still use credit once you have retired, but it will be a tool for specific purposes, not a routine part of a retirement budget.

Create a spreadsheet or a list on paper

Make a column for the loan or name of each credit card, the credit limit, balance owed, the interest rate, finance charge, the minimum payment, and the usual payment.

Consolidating Credit Card Debt: Use Balance Transfer Offers

Promotional balance transfer offers can be used to save money on interest charges while you are working on paying off the debt. By keeping on top of these offers and using them wisely you can make a bigger dent in the debt by reducing or eliminating the interest charges.

Most credit card companies will arrange to pay off your other cards directly, or they will send you the cash in a credit card cash advance and you can pay it off yourself. If you might be tempted by having the cash in your bank account, have them do the transfer for you.

If you have recent balance transfer offers for any of the accounts, find out what the terms are. This is things like "0% for balance transfers for 12 months" or "until November 2013" for example. Find out the balance transfer fee for each offer.

Add these columns to your chart: available balance, promotional rate (0%), term (number of months), transfer fee.

If you don't have any recent offers on hand, call your card companies and ask if they have any offers available to you. While you have them on the phone (if you haven't already), ask if they can lower your current rate if you plan to keep a balance there while you are reducing your debt.

Now you have a chart that looks like this (example only):

consolidating credit card debt balances

Now that you have charted your debt details, compare credit card rates and the cash advance rates (Promo rates.) Now pay attention to the finance charge total.

This example shows $146 each month that just goes to pay interest! That's almost $2000 of your annual salary that you're throwing away! In reality, yours could be much more than this. If it's less, be thankful.

Just think how much that would be worth if it were going into your retirement savings!

The next thing to do in consolidating credit card debt is to figure out which balance to move and to where. Start by moving the largest balance to whichever card will fit. In this example, the Airline Visa card has $4000 available at 0% for 12 months.

You could move the Equity Line balance, but that's not the best choice because it has the lowest interest rate, AND it is probably tax deductible interest. That leaves the Visa and the Mastercard as the highest savings options.

Even though the Mastercard has the highest balance, the Visa has the highest finance charge and interest rate, so that's the one we'll move to the Airline Visa.

How to "MOVE" a balance

If you haven't done this before, you may be wondering what I mean by "moving a balance." In this example, I could do it 2 ways.

One way is to call the Airline Visa company and ask them to do a balance transfer. You just tell them what company you want to pay, the credit card number (the Visa account), and how much to pay.

The second way is to use a balance transfer check you received from the Airline Visa company (for example) and use that check to make a payment of the full amount to the Visa account.

If you have a large enough account, you may have an option of consolidating credit card debt for more than one account to the large one.

Next, move the Airline Visa balance to the Visa at 0% for 12 months or the Mastercard at 2.9% for 18 months. Decide this based on the transfer fee, or the future normal rate, and whether or not you can pay it off in 12 months or not. Either way is better than the 18% you're paying now (in the example.)

Here is what we end up with:

credit card cash advance savings

The Visa now has a zero balance - put this card away in a safe place and don't use it anymore.

By consolidating credit card debt to low interest cards, your highest interest rate went from 21% to 14%. Not only that, a large chunk of your debt has zero interest for a while. Now your monthly payments will work towards reducing the balances instead of just covering interest charges. Your monthly finance charges went from $146 to $69, for a savings of $77. Now that $77 will go against the debt instead of interest charges.

Minimize Interest Charges

Consider replacing your high interest cards with lower interest rate cards. The money saved in finance charges will put more money against your debt without raising your payment amount (but you should raise it if you can anyway).

Even though the minimum payments required will be lower, you MUST continue paying more than the original minimums. Ideally, you should pay what you paid before, plus extra.

Focus all extra money on the highest interest balance first and pay the minimums on the others until the big one is gone. Once that's out of the way, focus on the next highest. If there are still balances when the promotional period runs out, look for new offers to do other transfers, but only if the balance won't be paid off within 2-3 months. That's the approximate break-even point for saving money when you consider the transfer fees. Always do the math to be sure you will save money doing a balance transfer.

Very important: Remember that your goal is to eliminate your credit card debt. While you are tackling this debt aggressively, make sure you are not adding new debt by spending more than your budget allows each month. If you need to buy something that costs more than your available cash, sell something or reduce spending somewhere else. DO NOT increase your credit debt by continuing to spend more than you earn.

Look at your total monthly credit card payments. In the example, the $275 that goes to credit cards each month will eventually be spare cash when you no longer have this debt. Won't it be great to have that extra money every month? Focus on that goal!

I wish you success in consolidating credit card debt to get it paid off as quickly as possible!

What To Do: Step 3

Use balance transfer offers with the lowest promotional rates to reduce your interest charges each month. This makes your payments worth more to your bottom line.

Do the math to understand the balance transfer fees. Choose the longest offers to make the most of them.

While you are aggressively paying down your debt, keep using this technique until your debt is gone.

Call your credit card companies and have them do the transfers for you. Ask questions and make sure you have all the facts before you give the go ahead. Resist their sales tactics and stick to your plan.

Once you get your budget under control and you begin to have extra cash by eliminating credit debt, review your retirement plans.

If you haven't started saving for retirement, this is an excellent time to setup an automatic retirement savings plan. Enroll in a 401k plan at work. If there isn't one available, open an IRA and setup automatic transfers or deposits of some of your income each month. If you need more information, see 401k retirement plans.

If you have fewer than 20 years before retirement age, you may need to contribute the maximum allowed for retirement accounts so that you will be adequately prepared for a fun and stress free retirement.

Learn as much as possible about retirement planning by reading other pages of this website. (See the menu on the left.)

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Best Credit Card Offers

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Eliminating credit card debt
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