Eliminate Bad Debt - Stop paying triple with credit cards

Now that you're sticking to your budget, it's time to concentrate on digging yourself out of debt. The next step of my 6 step plan focuses on credit card debt. The average American household has nearly $16,000 in credit card debt. Not a big deal, right? Assuming you pay the minimum payments at 20% annual percentage rate (APR) it would take you 14 years to pay off your credit cards. Even worse, you'll have paid $30,000 in interest on top of your original amount. Remember those $100 shoes you put on your credit card? By the time you pay them off they cost you $300.

You'll never dig yourself out paying just the minimum monthly payments. Follow this aggressive payment plan:
  • Rank all your credit cards from highest APR to lowest. Put all of your extra money towards paying off the highest APR card and the minimum payment on the others. Keep going down the list until they're all paid off.
  • Transfer your balances with a 0% APR offer. You can pay down your debt for 18 months interest free! What's the catch? Credit card companies are betting you'll keep spending instead of saving but stick to your budget and you'll win. If you can't pay down your debt at the end of the 18 months transfer again to another 0% APR card. Use these offers for the highest APR credit cards first.
  • Lock away your credit cards but don't cancel them. You're switching to a cash-only spending plan. Remember that budget you made? Take out your spending budget in cash every month instead of going back to credit cards. Studies show you're less likely to spend cold, hard cash especially in large denominations. $100 bills will tighten up your spending habits quickly.
  • Throw everything you have at the highest APR card. This includes savings accounts, home equity loans, loaned money from family. Try a low rate personal loan from Lending Club. Unless you have a magical savings account that's earning you 15-20% interest (no one does) you're losing money by not paying off your debt.
The same principles apply to any high interest loan (personal loans, car loans, etc over 10% APR). There's a difference between good debt and bad debt. Everyone is expected to have a mortgage, student loans, and sometimes even personal loans (they actually help your credit score). Don't feel the need to pay these down quickly if they have a low rate. Money devalues about 3% every year because of inflation. So if your student loan has a 2% APR, the bank is actually losing 1% on you.

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