6 Reasons to Eliminate Credit Card Debt

Like you really need a reason to not have to pay someone else for buying something you don't need to have in the first place. But for those of you who do, here are 6 great reasons (I can think of) why having a credit card balance stinks.

6 reasons to get out of debt

1. Interest costs and fees alone can accrue to 2, 3 or even 5 times the original cost of the product depending on your credit card rate and current balance. And you thought you were buying that item on sale. The next time you purchase something with a credit card, first triple the cost of the item you want to buy, and then ask yourself whether the item is really worth it.

2. Changes in notices for your credit cards over the lifetime of your debt can really make it harder for you to pay anything off. Do you ever get those changes in your credit card agreements? Ever read them? Neither do I, except once. It is simply amazing the amount of changes that can affect your ability to pay. They can change your statement date, the interest rates, the default period, the fees, the time you have pay, and whatever else they can legally do. Since you did receive notice, you have been fairly warned. So by keeping a balance on a credit card, you run the risk of incurring a charge to your credit card you may have overlooked.

3. Preventing hardship is certainly the best cause for getting out and staying out of debt. I am sure most of us have been unemployed at one time or another. The bills keep coming in, along with the credit card statements. Now imagine if you paid off those credit cards before you even told your boss off and got fired. There would be fewer bills to worry about at the end of the day, which helps prevent making a hard situation even worse.

4. Psychological freedom is what happens when you don't owe anymore to "the man." You feel a big weight has been lifted, and you can now take your seat belt off and run about the cabin.

5. Adding to your monthly income is rarely considered. Think how much you have to pay in credit card debt a month ($50, $100, $200 or more)? Paying off that amount is equivalent to giving yourself a raise of that same amount. Saving $200 a month is the same as getting an annual $2400 raise in your salary, which could be used to help your to retire early by building your retirement plan.

6. Opportunity costs are those things you could have spend money on that you sacrificed by having to make credit card payments. Imagine what you could do with that extra loot every month. Well, this may be a good thing because who needs another gaming system. On the other hand, stick with an investment plan.

Let's face it. No matter what reason you choose, credit card debt is not fun, it's legally binding, and it doesn't go away. And because credit cards are tied to your credit score, it can affect your cost of borrowing. Would you really want to pay a higher interest rate on a new car or house because you couldn't handle a few hundred or a few thousand dollars in debt? It really doesn't make sense when you think about it.

How to get out of debt?

Step 1: Take a pen out, collect your bank and/or brokerage statements, and make a budget. You can't start to get out of debt until you know that you will have enough after tax income to cover all your expenses. With a little bit of frugal living, you can determine which expenses can be cut. I wrote one post that may give you tips on how to save money. When you have found a way to create additional income to pay off your credit cards, go to Step #2.

Step 2: Talk with the credit card companies and negotiate a lower rate. Here's one way to start:

You: "Hi ****, I have a pretty high rate with you guys, but I have been getting lower offers from other card companies. I really want to stay with you guys. Could you lower my rate? [Pause for response]

You: My rates I have been getting are *** [if you have].

You: Is that the best you can do?" [Remain silent... bite you tongue if you need to]

If this doesn't work, you can try a different credit card company. The point here is to negotiate a lower rate so our new found income from Step #1 will go further to pay down our debts than with a higher rate.

Step 3: There are actually several approaches to paying down your debt. Start by laying out all of your credit card statements in front of you. Your objective is to focus on ONLY one credit card and pay as much as additional income you created from Step 1 towards getting it paid off and then pay the remaining balances for the rest of the debts. So where do you start?

- Highest balance

- Highest rate

- Smallest balance (snowball method)

The Snowball Method: There are advantages and disadvantages to each method. Finance experts recommend the snowball method where you are paying the smallest balance first. While this may not be cost efficient, snowballing has a significant psychological affect. Paying off the lowest let's you see your effects immediately. You pay it, and the lowest balance goes down quicker. You immediately see results and are encouraged to move to the next credit card balance, and pay that off as well (just like a snowball moving down a hill).

The highest rate method: This is when you just focus on the credit card with the highest interest rate amount, and pay it off. While 1% or 2% difference may not matter, 5% or 10% may make a big difference in the long run. This tends to be more economically efficient, depending on your situation. But it may also take longer to pay off than snowballing, depending on your balances.

The highest balance: This can be compared to climbing a mountain before climbing a hill. It takes a great amount of perseverance and willpower to pay the highest balance first, and over time you may get disheartened. If you normally seem to get easily discouraged, start with the Snowball method. You will see results faster.

There is no one set way to start because everyone's balances, rates and number of credit cards are different. But one way to assure success is to choose a method and stick with it.