10 Ways to Dig Yourself Out of Credit Card Debt

By Brian Reed
July 08, 2011

Many Americans have struggled with the burden of credit card debt at one time or another. And getting out of the red and into the black can often seem overwhelming.

If this is any consolation, you're not alone. Credit card debt affects nearly one-third of Americans. At the end of 2010, the average consumer in the U.S. owed $4,200 to credit card companies.

While that number is down slightly from years past, it remains startlingly high. If you are one the millions of Americans burdened by credit cards, here are 10 ways to help you dig yourself out of trouble.

1. Stop Using Your Cards

The first step in ridding yourself of credit card debt is to stop adding to your balance. Credit cards are convenient, but if each purchase is increasing your charged interest, the card isn't worth it. It will be difficult at first, but switching to an all-cash system will help you stay within your monthly budget. Spending with cash is another way to become aware of what you spend so that you can waste less and apply more toward quickly minimizing the balance.

2. Track Spending

Behavioral studies have shown that individuals who keep a record of every purchase spend less money. You can do this electronically or with the old-fashioned pen and paper. Of course, it's best to do it with a written budget, but even with no budget in place, just becoming aware of what you spend through tracking has been proven to positively affect your bottom line. Review your results weekly to see if your spending is on track with your goals.

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3. Prioritize Your Debt

Not all debt is created equal. If you have two credit cards and one has a 6.5% interest rate and another has 12%, the long-term cost of the loans will be different. By shifting resources from the lower-interest card to the card with higher interest means a lower total payment.

Some financial experts recommend the "debt snowball" technique, which involves starting with paying the smallest debt first. The idea is that eliminating the lowest balance will create positive momentum. Plus, the minimum payment of the recently cleared debt can then be applied to the balance of the next in line.

4. Get a Game Plan

Paying credit card debt can seem like endlessly throwing cash into a black hole. A great way to take charge is to determine the maximum amount you can pay and how many months it will take you to become debt-free. Having a plan will help you reach your goals faster, and having a "debt-free date" can keep you on track when times get tough.

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5. Reduce Expenses

It might sound obvious, but it is essential to live within your means in order rid yourself of credit card debt. If you haven't already, take a good look at where your money goes every month and cut out all non-essential expenses. Eating out is one common area where funds can drain your monthly budget.   Overspending at the grocery store, impulse buys on the weekends and daily lattes are other areas where the fat can often be trimmed.

6. Consolidate Balances

If you have balances on multiple credit cards, it could be in your best interest to consolidate them. Consolidation involves transferring the money owed on one card to one that has a lower interest rate. This move can simplify the repayment process and could save you hundreds of dollars in interest payments. Keep in mind that balance transfers often involve a fee of $250 or more -- so be sure the long-run savings outweigh the hit you'll take in transfer fees.

7. Drain Your Savings Account

Saving money is important, but the interest earned from a savings account pales in comparison to the interest you're paying on a credit card. For example, if you have $1,000 in a CD earning 2% (or less) and $1,000 owed to a credit card with 18% interest, any earnings from your savings account will be lost to the higher interest of the credit card. The better solution is to reduce the amount owed on a credit card by liquidating a savings account. Then after the debt is paid off, you can begin to build back your savings. Throwing all available resources onto your debt will help you become debt-free that much faster.

#-ad_banner_2-# 8. Sell Your Stuff

If you're like most people, you have plenty of stuff around your house that you never use. Hosting a garage sale or posting items on Craigslist can help you free up closet space and make money to put toward your credit card bills. There are also a number of new websites that offer swapping services [http://www.thredup.com/]. While you won't make anything by selling your items, you can trade goods you don't need for those you do -- say, baby clothes for toddler clothes -- and save yourself any new expense.

9. Get a Second Job

There are basically two ways to get your finances back in order: by reducing expenses or increasing income (or both). A part-time job is a surefire way way to increase your monthly income and an effective means for eliminating debt -- as long as you're adamant about using the extra income only for that purpose Whether its waiting tables, baby sitting, freelance writing or filling out online surveys, find a way to increase the money you bring in each month and pay it straight to your debt.

10. Negotiate with Creditors

Negotiating with credit-card companies isn't the optimal solution, but depending on your situation, it could offer a viable resolution. It provides the opportunity to pay a lump sum to clear the debt, which is often less than the amount owed, or lowering your payments for a few months while you get your head above water. Just remember, a lump-sum settlement can severely penalize your credit score (it's ultimately considered a default), so be sure you're clear on the implications before you agree to the terms.

The Investing Answer: Credit card debt can be a mental weight that keeps you feeling defeated and overwhelmed. As you begin to shed these obligations, you'll find that with every card paid off, a burden is lifted off your shoulders. It's not an impossible task, and with a solid game plan and small behavioral changes, you can achieve your financial goals.