The bad news: you're up to your knuckles in debt. The good news: you can get out of debt. The better news: you don't have to destroy your credit cards! The slightly worse news: you still can't really use them.
Credit card debt is no one's first choice, but you're just in time to make the 2011 New Year's Resolution all about living within your means and totally. eliminating. debt.
2 Techniques to Eliminate Debt Using Credit Cards
Debt transfer
If you've been paying your credit cards on time (just not in full), chances are you still have a pretty good credit score. You can put that score to good use and apply for a 0% interest credit card. If approved, transfer your highest interest debt to that card, which will give you several months of interest-free time to pay that sucker off. The money you had been paying in interest can go toward paying off any other credit card debt over the minimum balance. This works when: you have the moral resolve to dedicate this credit card just to paying off your debts. This does not work when: you use your new no-interest credit card to buy more things. Other risks:
- The interest-free period only lasts a finite amount of time. Is it long enough to pay off your debt? If not, you may be paying higher interest than your original card.
- When it does expire, how much will your interest be? If it's really high, you may end up in a bigger pickle than you began.
- You keep transferring your debt to different no-interest cards every time the interest-free time period runs out, making you a high risk to creditors. They will see you as unreliable and may shut you out of future accounts, leaving you stuck with another high-interest credit card.
- Some initial fees may break the bank even more. Read the fine print!
Debt consolidation
If your debt is coming from multiple sources, each with their own interest rate, a popular get-out-of-debt-quick technique is to get one loan with a low- and/or fixed-interest rate to pay off everything else in one fell swoop; in other words, credit card debt consolidation. Then, you can focus on paying off only one debt with one interest rate. This works when: you can get a loan without a monstrous interest rate of its own. This does not work when: your loan's interest rate is up in the 20s and you end up paying out more in the long run. Other risks:
- You employ a Debt Consolidation service that will charge you a fee. You might as well burn the money. You can do everything they do on your own: choosing to pay off high-interest debts first, negotiating for better rates, and stretching out your payment plan.
You Can Keep Your Cards, But…
…you can't use 'em. Sorry. Credit card debt requires a lifestyle change and until you can manage your finances within your means, pop those tempting squares of plastic in the freezer and try a prepaid debit card – or, hey, what about cash? – for awhile. Don't worry. Your credit cards will be waiting.
