Put it all on one page
List every debt with four facts: the balance, the interest rate, the minimum payment and the due date. Include cards, car and student loans, medical bills, and anything owed to family. Then stop adding to the pile. Take the cards out of your wallet and delete them from the sites where they are saved, because no payoff plan survives new charges.
Why minimums are a trap
Minimum payments are designed to keep you paying as long as possible. Take a $5,000 card balance at 22 percent. At $100 a month, it takes more than eleven years to clear and costs about $8,700 in interest. At $250 a month, it takes about twenty-five months and costs roughly $1,300. Whichever method you choose, the mechanics are the same: pay the minimum on everything, put every spare dollar on the single target debt, and when it is gone, roll its entire payment onto the next one.
Lowering the rate
- A balance transfer card offers zero percent interest for twelve to twenty-one months in exchange for a fee of three to five percent, and it works only if you divide the balance by the number of months and pay that sum without fail.
- A fixed-rate personal loan from a bank or credit union can replace several card balances with one payment, a lower rate and a definite end date.
Either helps only if the cards stay unused afterward. Consolidating and then running the cards back up is how people double their debt.
What to protect while you pay
Keep a starter emergency fund of about $1,000 so that a car repair does not go straight back on a card. Keep contributing enough to capture an employer retirement match, since that return beats any interest rate you are paying. Debts below six or seven percent need not be rushed.
When it is more than you can manage
If the minimums alone exceed what you can afford, contact a nonprofit credit counseling agency affiliated with the National Foundation for Credit Counseling. A counselor can set up a debt management plan, in which creditors often cut rates sharply and you make one monthly payment over three to five years. Be wary of for-profit debt settlement firms that tell you to stop paying your creditors, because the credit damage is severe and the fees are high.
Tip Make the extra payment on the day you are paid, not at the end of the month with whatever is left. There is rarely anything left.
