Credit Card Debt Facts
The first step to handling any problem, and excessive credit card debt is no exception to this, is to focus on the facts. Here, that means finding out how much you actually owe and what the monthly payments and interest costs are.
It's surprising, though maybe we shouldn't be surprised, how many people who are troubled by credit card debt problems, don't actually know how much monthly interest they're paying to the credit card companies. Part of the problem probably is, at least for many of them, that they really don't want to know. I guess that when you think about how large the figure sometimes is, one can hardly blame them.
But the first step back to financial health, as with your physical health, is a good diagnosis. If you are paying $200 per month in interest charges alone on a monthly net income, say, of $4,000, then you are paying 5% PER MONTH of your income for what amounts to nothing. It's not completely nothing, since you are, or were, enjoying the things you bought previously. You would have had to save to purchase them outright, otherwise.
But, and let's be honest here, is that really worth 5% of your income?
When that $200 a month (and for many, it's much more) becomes the total you are barely able to pay each month, you have reached a point where you will never pay off the debt. If all the money is going to interest, then none is going to reduce principle, and the amount of interest is computed on the amount of principle. This may be an extreme case, of course, but consider how much of the monthly payment in your personal circumstances goes for interest versus repayment of principle.
By the way, many people are finding themselves in worse and worse situations as the interest due on their credit card debt grows larger and larger.
Let's just suppose that it's 90% interest, 10% principle. That's really the approximate average case for the a home loan for the first several years. You can use any decent online calculator to see how long that will take in your situation.
Suppose, for example, you owe someone $10,000 at 7%. You could pay only $116 per month, but it would take you 10 years to pay it off. The interest alone would cost you $3,933 - almost 40% of the total amount.
Now that you've seen your situation, you need to take two further steps.
Step one is to develop a budget that will allow you to make payments as large as you can handle to get the bills paid off. You could use what is called the "debt snowball method" and pay off the smallest one first. Then apply what you were paying to the smallest to the next smallest (which is now the smallest), until you've reached the end of all your debt...usually mostly made up of credit card debt.
Alternatively you could pay down the largest bill. That would save you the most in interest charges, but it's hard for many people to stick to it, particularly when they see such slow progress.
The hardest - and certainly most important - step, which should be carried out simultaneously with the first step, is to stop borrowing.
You should not allow yourself to incur any further debt until you have paid the first down to a reasonable level. That level is is going to be zero for you credit card junkies, and you know who you are.
For others, it may be somewhere around the 5% range. For some with good willpower, good income, and who are willing to eat the overhead, 20% is the maximum.
Facing reality and making a commitment to long-term change are the two hardest things for anyone who has entered financially turbulent waters to do. But they are the bare minimum required, if you want to recover your financial health and independence. The other alternative is bankruptcy, and you don't want to go there.
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