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Jul 25 2011 12:00AM

Question


I have excellent credit. However, I have two credit cards with high balances. What is the fastest way to reduce the balances? I don’t use them very often and understand if I cancel them with a high balance it will affect my credit. I am a home owner with a modest income. I want to get rid of my consumer debt.

Answer


“There are a few different strategies people use to eliminate consumer debt,” said FPA member Robert Sparks, CFP®. “The first one that I very seldom recommend is using a home equity line of credit (heloc) to eliminate the debts. The reason I don't recommend this is because you don't actually pay off the debt, you just transfer it. I bet that 80 percent of people who use this strategy end up right back in debt within just a few years time.  

“Another strategy is to place all of your focus on the highest interest rate debt first. After that is paid off, then you target the next highest rate. The theory is that any money you don't spend on interest will go to satisfy your debt even faster.

“The last common way is to use the snowball method. You pay all of your extra money on the smallest balance first, regardless of interest rate. Once the smallest debt is paid off, you roll that payment into the next smallest balance and so on. The idea here is that when you pay off the first card you will begin to see the results and that will keep you excited about paying off your debts faster.

“In either case, you have to stop using the cards and pay more than the minimum payments. You can increase your payments by one of two ways: make more or spend less. If your problem is with overspending, identify which expenses are essential and which are not. Cut out all non essentials until your debt is paid off. It may not be fun, but it is the price to paying off your debt quickly.”  

Sparks offers the following tips: 

  • Write down your total credit card debt and update it each month. Tape it to your computer, your car's dash board, your credit/debit cards, etc. Keep it in front of you at all times. 
  • Delay a purchase until some point in the future after you have achieved a goal.   
  • Start small. Paying down your debt by $1,000 may not be a big chunk of your debt, but it is a start and should be celebrated. 
  • Re-work your monthly budget and put it in order of importance. Start with your mortgage, then your goal payment for credit cards, then utilities, then food, then fun. If there is not enough left for fun, you have a decision to make.

“The most important part of solving the debt problem is identifying and fixing the behaviors that got you into debt in the first place,” said Sparks.

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