The Credit Card Debt Action Plan
The First Steps to Getting Your Finances under Control
Jan 24, 2009
When it comes to getting realistic about your credit card situation, you must face it head on. No more shoving the bills to the bottom of the “to-do” list or simply tossing them in the garbage and hoping the company you owe money to goes bankrupt before you do (unfortunately there will always be someone to buy their debt). No, you must face your credit card problem head on.
- Take out every single credit card you have and lay it in front of you. This includes, bank credit cards, department store cards and any money owed on appliances, televisions, or electronics. Essentially anything that isn’t your mortgage or your car must be laid out in front of you.
- Call each creditor and verify the amount you owe and the interest rate you are paying on the purchases. On a piece of paper, or in a computer spreadsheet, write down each amount and corresponding interest rate.
- Take a deep breath and ready yourself, then add up the total amount of debt you currently owe.
The number you see in front of you is the real number. Not the number you were hoping it wasn’t or the number you were pretending didn’t exist. This is the real number.
Calculate the Ballpark Interest Rate on Your Total Debt
This is going to be the most valuable tool in your arsenal to getting rid of your debt. Because this picture will show you exactly how much money you’re wasting on interest per year. (Note that this is a simple interest formula that will yield ballpark results. Actual credit card interest is figured daily.)
- Divide the balance owed on each account by the total amount of debt you owe on all of your accounts. Example: If you owe $50,000 on all of your accounts and the first credit card is $10,000, then it is 20 percent of your total debt or $10,000 divided by $50,000.
- Continue this until it has been completed on all of your credit accounts.
- Next, multiply the amount of money you owe by the interest rate you are paying on each credit account. Example: Using the above example, if the $10,000 you currently owe is at 15 percent, then you would multiply $10,000 by .15. Remember to use the decimal! Our answer yields $1,500. That answer represents a ballpark figure of how much interest you will pay on the credit card for one year.
- Repeat this process for the remaining credit accounts. Example: To make the numbers easy for illustration purposes, let’s say you have two additional credit accounts with $20,000 balances each. One card has an interest rate of 20 percent and the other 30 percent (because you might’ve missed a payment.) The ballpark math then becomes multiplying $20,000 by .2 which yields an answer of $4000 and multiplying $20,000 by 30 percent which yields an answer of $6000.
- Now, add the interest on all three credit accounts together: $1,500 plus $4,000 plus 6,000 equals $11,500.
- Finally, add the interest to the principal balance (amount you actually owe.) This yields $61,500. Then, divide that number by just the principal, which in this case is $50,000.
Your answer will arise at 1.23. Remove the “1” as that represents the principal balance that you owe. The .23 is the actual percentage on all of your debt. Translated it is 23 percent.
Cutting Expenses
Okay, now that the facts and figures are in front of you in black and white, you must figure out how to get rid of the debt.
- The first thing to do is return any and every item which you have purchased that you don’t need and has not been used. This means clothing, and electronics and things you just “had to have.” It will feel much better once you purchase them without any debt.
- Sell anything and everything that you no longer need. The invention of online auction sites has allowed all of us to become our own little entrepreneurs. Take an afternoon, create an auction account and list everything that isn’t tied down. (Just be sure to watch the seller fees.) Start with the items that are worth the most, and then work your way down to the smaller items.
- Cut any discretionary spending out of your budget. This includes entertainment, going to restaurants, and your daily trip to the coffee shop. (That alone can cost $1,000 per year.) Another place of discretionary spending that people don’t think of is your grocery bill. It can be quite seductive to buy a little of this and a little of that as you roam the grocery aisle. As a challenge to yourself, see if you can cut the grocery bill by 25 percent. You might use coupons, or buy the store brand, or cut back on sodas and juices. Saving just $50 per week can add $2,500 to your bank account.
When it comes to resolving your debt issues, acknowledging the problem, understanding the amount you truly owe, and beginning to pay it back will start you on your journey. Remember not to get derailed. Also, keeping a monthly chart where you cross off the previous amount you owed and writing the new amount is a healthy way to give yourself a visual reminder of your progress.
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