Reducing Credit Card Debt - It's Never Too Late To Start

Reducing credit card debt usually is not a big topic you find being discussed at a dinner party. No one wants to admit they have not managed their money or credit cards well.

In fact overspending has it's own TV series called 'Big Spenders' and credit cards debt usually find itself at the root of the problem. The problem of bad financial choices and over spending is not uncommon.

Reducing debt on credit cards does not need to be a complicated exercise. The actions to take are simple and basic. A few calculations and tracking expenses will quickly show you where the money is draining from your bank account. You'll also discover where you need to begin to take action to keep yourself out of the bad credit zone.

Budgeting Guidelines

Most consumers hate the word "Budgeting" and look at it as a restrictive money item.

That simply is not true. A budget actually tells your money WHERE it will go before the money arrives instead of money going where it wants to go. Budgets are tools nothing more nothing less.

Financial institutions and leading companies use a different kind of "budget" when reviewing loan applications for debt consolidation and approving loans in general. When looking over your financial statement they want to make sure your expenses are within the recommended guidelines.

If your income and expenses are out of balance a flag goes up quickly. This flag puts your loan or credit application in jeopardy or at a higher of being approved.

Keeping your expenses within the recommended budget guidelines plays an important part of reducing your debt and living with less stress.

How does your budget or expenses stack up against the lending communities guidelines?

Ratios for Debt Income

The debt/Income ratio is calculated by taking the amounts required to pay the regular monthly bills or debts each month and divide that number by the after tax take home pay.

Knowing this debt income ratio or percentage will help you gain a better understanding of your debt load and how it relates to your current financial situation.

For example if your income take home pay was $3500
Mortgage including taxes and insurance - $1250
Auto payments - $325
Credit Cards - $500
Other monthly expenses - $750

You would be spending $2825 per month with a debt income ratio of 81%.

Anything over 50% and you should begin to look for ways to reduce your debt.

Credit To Debt Ratio

Many people close or cancel their credit card account once they have paid it off. Depending on you financial position it may not be the best steps to take. Canceling the account can in fact have a negative impact on your credit score.

The negative impact comes from the Debt to Credit ratio which works similar to the Debt Income ratio but in reverse. The Credit/Debt ratio is the relationship between your total debt and the credit limits you have available. By canceling a credit card you actually raise the amount of money you owe vs. the amount you can borrow.

One item to be aware of in keeping a zero balance credit card open. If you are planning on getting a mortgage a zero balance credit card could have a negative impact on your loan being approved. Why? Lenders may look at the zero balance on the card as the method you will use to furnish the home. This in turn would raise your credit to debt ratio.

Pay Yourself First

The idea of paying yourself first is not a new idea. Read the classic "Richest Man in Babylon." The key to insuring long-term financial stability and protecting future success begins by paying yourself before anyone else. The task by itself looks easy when in reality few people do it. The fun of "living" paying bills and increasing debt seem to come way before paying yourself.

If you stop and think about it for a moment - do you want credit card companies to prosper more than yourself? Start today paying yourself. Make it a habit! Start small if you have to - but start doing it.

If you have a 401K at work look at increasing the money they take out each pay period. Do it by percentage and not dollar amount.

Creating a Snowball With Credit Card Payments

You're probably familiar with the picture of a snowball rolling down a hill getting bigger and bigger. You can pay off your credit cards using the same snowball affect.

Take all your credit cards and list them from the highest balance to the lowest. Start paying the minimum balance on all the credit cards except for the card with the lowest balance.

Now get aggressive and take any extra money you can squeeze and pay as much as you can on that card each month until it has been paid off. Even $10 per month will make a difference.

Then start to apply the money you would pay on that card to the next lowest balance. Continue to do that on each card until all the cards are paid off. This is the snowball affect in action.

The extra money you are paying each month compounds as each card gets paid off just like interest and starts hammering away at the balance in big chunks.

Get Financial Smart

Unfortunately much of the school system teaches little on getting financially smart. You do not need to be a money whiz to manage your credit or debt. All that is required is some basic financial knowledge and calculations.

Spend less than you earn and invest the difference - That's financial smarts!