Some debt is good debt, and some debt is bad debt. Good debt can be in the form of a mortgage or school loans—both are really more like an investment than a debt, because there’s a strong potential for return. With a mortgage on a house, you now have the house in exchange for the debt—you can sell it if you need to pay off the debt quickly, and you can make a nice profit if you sell at the right time. School loans aren’t as great as mortgages, but they too are an investment in yourself that pays off in the long run—college graduates make an average of $1 million more over a lifetime than high school graduates.
Credit Card Debt is Not Good
Credit card debt, however, is bad debt. Chances are, you can’t sell back whatever it was you bought with your credit card to pay back the debt—and that year’s worth of expensive coffees, designer handbags, electronic equipment, or whatever it was that got you into debt is likely not to go up in value. Credit card debt is some of the worst debt to have. Here’s what you can do about it.
Know how deep a hole you’re in. Before you can dig yourself out, you need to know how deep you’re in. Many more people than you’d think simply avoid adding up all their credit card debt—because they don’t want to see how bad it is. But in the case of credit card debt, ignorance isn’t bliss—it can actually hurt you. Get all your credit card bills together and figure out exactly what you owe.
Consolidate and stop charges. It’s likely that having a large number of credit card accounts is one of the things that got you in trouble in the first place. Pick your lowest-interest account, and move all of your credit card debt onto that card. Don’t pick the card that gives you the most “rewards”—those are just hooks that card companies use to get you to keep spending. A low interest rate will beat out those rewards every time. Then, contact all your other credit card companies and ask them to stop allowing charges on those accounts. This will save your credit, which can be damaged if you close too many credit card accounts at once.
Contact your lender. Next, contact your credit card company. Explain to them that you are taking serious steps to pay back your debt. Many lenders will work with you to help get your debt paid off—and some companies will work with you to develop a payment plan, or even lower your interest. If you want, negotiate a lower rate before you switch your debt to one card—this will give you more leverage, and you can play your cardholders against each other for the lowest rate possible.
Work out a budget. Add up all your fixed and variable expenses for the month, and subtract that from your total monthly income. This will tell you how much money you have left over after paying your monthly bills. Figure out if you can afford to make more than minimum payments on your credit card debt—and if you can, do it. This will lower the amount of interest you pay over time.
Juggle your loans. You may have more than one source of debt—a car loan, school loans, or other debt in addition to your credit card debt. If this is the case, pick the highest-interest debt and pay as much as you can on that every month, while paying little more than minimums on the rest. Then, when that debt is paid off, start making large payments to the second-highest interest loan. The less interest you spend over time, the better your finances will be in the long run.
Credit counseling. If you’ve tried to stick to a budget and just can’t do it, get in touch with a credit counselor. They can help you sort out your finances, figure out the problem with the plans you’ve been setting up for yourself, and get on a plan that works for you. Be wary, however, of businesses that advertise that they can make your credit card debt disappear or create a new tax identity for you legally. There is no legal way to do this, no way to make debt “disappear”—apart from bankruptcy—and most of these businesses are scams.
Millions of people have gotten into trouble with their credit cards—the good news is that if you’re in debt, you’re not alone. And that’s not all the good news—credit card debt can be controlled, even eliminated entirely, through a disciplined spending plan and savvy negotiating with your lenders. But don’t wait to pay your credit card debt down, and don’t just pay the minimum balance—many of those minimums are carefully calculated by cardholders to ensure that you keep paying interest and that even a low balance takes years to get rid of.