Experienced seafarers say it takes just over four miles to stop an aircraft carrier traveling 35 miles per hour. As daunting as that sounds, the effort required to stop runaway credit card debt can be just as great. This is because credit card debt has the ability to build upon itself.
Each monthly balance accrues interest, which becomes part of the balance against which interest is calculated the following month. Continued unabated, this could theoretically stretch into infinity.
Fortunately, though, there are some smart ways to deal with credit card debt to help you bring it back under control.
The Snowball Method
Let’s say you have three credit cards with combined balances totaling $17,100. One of them has an outstanding balance of $12,900, with a minimum payment of $233. The second one has a $3,700 balance, with a minimum payment of $84 and the third one has a $500 balance with a $25 minimum payment.
You have $900 monthly to put toward paying them, which you’ve been dividing equally among the three, paying $300 on each one. While this certainly keeps the card issuer happy, that $12,900 balance alone would take approximately 43 months to satisfy at that rate.
Instead, make minimum payments on all except the $500 balance. This leaves you $583 to put toward that one, enabling you to pay it in full in one month. Apply the remaining $83 to the next lowest balance that month. You’ll then make a payment of $667 on that one in subsequent months, which will pay it off in approximately 6 months.
This will then leave the full $900 to put toward the $12,900 balance, which has also been chipped away by the minimum payments you made while paying off the others. Using this method, all of your credit card debts would be cleared in approximately 18 months.
Debt Consolidation
This approach finds you taking out a loan to encompass your outstanding balances and using it to pay them off. The benefits here are one bill to deal with rather than three, a potentially lower overall interest rate and a shorter payoff time — if you shop carefully.
Credit card consolidation can be accomplished by applying for a balance transfer card, taking out a personal loan, getting a home equity loan, or doing a cash-out real estate refinance. Your payoff time and the interest you’ll pay will be determined by the terms of the loan you accept. However, given the same outstanding balance and cash available to make payments as in the scenario above, 20 months to payoff isn’t an unreasonable estimate.
On the other hand, you’ll need a strong credit score to make this work. That personal loan will be unsecured and will carry a higher rate of interest than the other two, which will be secured by the property you offer as collateral. This means trading unsecured debt for secured debt, which could cost you the property if you were unable to pay the loan as agreed.
Other Debt Reduction Methods Include:
Those two smart ways to deal with credit card debt will help you pay it off much sooner and preserve the integrity of your credit score. Other methods, such as debt management, debt settlement and filing for bankruptcy protection are also useful if you can’t do either of those because of income or credit limitations.
These latter three methods do have some rather significant consequences in terms of your credit history, but odds are your credit score has already dropped if you need to avail yourself of one of them. Still though, the good news here is a runaway credit problem can be stopped — just like that aircraft carrier.
