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Paying down your credit cards: A 10-step plan

Dear Dollar Diva,
I have $17,000 in credit card debt on two cards; the interest rates are 8.5 percent and 9.9 percent. I pay between $700 and $800 a month, which is more than the minimum payments. I see the balance declining, but I wonder if there's a better way to pay these off? I'd love to consolidate to reduce my monthly payment, but I'm not interested in a home equity loan. Any good ideas? -- Brad

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Dear Brad,
You are wise to leave your home equity alone. Replacing credit card debt with a home equity loan doesn't solve the debt problem: A debt by any other name is still a debt.

Consolidating the debt so your monthly payments are lower is also a bad idea. The longer you string out the payments, the longer it will take to pay off the balances and the more you'll be shelling out for interest.

Credit card debt is not something you want to hang on to. Your rates are relatively low, but that could change in a minute. By law, card companies need to give only a scant 15 days' notice before changing your "fixed" card rate. Read more in the Diva's "Credit card company tactics."

If home equity and consolidation loans are not the answer, what should you do? Make huge monthly payments on the debts to pay them off as quickly as possible.

It won't be easy. To help you do it, here are 10 steps to help you free up cash with temporary lifestyle changes and use that money most effectively:

  • Stop spending money on nonessentials. No new clothing, shoes, jewelry, expensive gifts, CDs or other toys until you pay off the debts.
  • Stop using plastic. Resist temptation by making your credit cards inconvenient to use. Try freezing them in a block of ice.
  • Declare a moratorium on travel and expensive entertainment. The library and local forest preserve provide free entertainment. When you make the debt disappear, Disneyland will still be there.
  • Cut telephone expenses. Make fewer long-distance calls and get rid of expensive cell phones.
  • Spend less on groceries. Try meatless meals and generic brands. Shop with a list.
  • Spend less eating out. Until you shed your debt, shun fancy restaurants -- even on birthdays and anniversaries.
  • Conserve everything. Use less water. Drive less. Turn off lights. Lower your thermostat in winter and raise it in summer.
  • Bring in as much cash as you can. Work overtime, moonlight and sell stuff you don't need.
  • Keep busy so you're not tempted to spend. That overtime will take up part of your free time. So will going to the gym more frequently and taking your children to the playground.
  • Pay off the highest-rate card first. Debt gets paid down faster when you retire the debts in order, from highest interest rate to lowest. In your case, make the minimum payment on the 8.5 percent credit card debt each month; use all of the extra cash you have, including the money from the belt-tightening, raises, bonuses, tax refunds and other sources to pay down the 9.9 percent card to zero. Then switch to the 8.5 percent card.

When you pay off both cards, retire the one with the highest interest rate and keep the other on (or in) ice. Use it only for emergencies. Make sure you read the Diva's "Closing your credit card accounts" for the steps you need to take to get rid of your credit card the smart way.

-- Posted: July 2, 2001




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