The best advice on credit card debt to follow begins with a plan. In fact, you should have a plan for your finances to guide your debt repayment, spending, saving and investing.
The dreaded “B” word – Budget or cash flow plan can reduce the time you are in debt and can save you potentially hundreds or even 1000′s of dollars.

To start, collect and list all of your outstanding debts. The latest statement such provide the current balance of the debt and also the interest rate. If your are not organized this may take some time, but the “pay off,” no pun intended, is worth the work.

Make sure you list all the debts – credit cards (each one separately) , mortgages, cars, boats, motorcycles, furniture, home equity loans or lines or credit, and even the money borrowed from your parents! Without a full picture of your debt, where you are at, how much is going for interest and what is required each month, you can never create a workable plan. Every dollar matters when you are getting out of debt or saving and investing for the future.

Some people argue over “good debt” and “bad debt” and make general assumptions that “good debt” would be considered something like a house which appreciates in value. However, any debt which you cannot afford and makes you a slave is “bad debt.” Tops of the “debt to eliminate” list:

• Credit Cards
• Consumer loans – e.g. Furniture
• Car Loans
• Student Loans
• Car Loans
• Home Equity loans
• Home Mortgage

Now that you have all the debts listed rank them from smallest to largest regardless of the interest rate.

Pay the minimum amounts on all debts except for the smallest debt and focus all your energy and extra money on paying off the smallest debt first.

It will take some sacrifices and changes of habits to move towards becoming debt free. But it is so very worth it!

The steps outlined above are simple and powerful – but take commitment! You DID NOT wander into debt and you cannot wander out!

If your debt overwhelms you, as credit card debt does to many, consider seeking debt consolidation help and begin changing your life!

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?

• Housing 35% – This includes not only your mortgage or rent but property taxes – insurance – maintenance and utilities
• Transportation – 20% – Monthly payments – insurance – gas – oil – repairs – maintenance – tolls – parking or any other transportation needs.
• Debt 15% – Credit cards – student loans- consumer loans- personal loans and any other payments on debt
• All other expenses 20% – Food – clothing – personal items – insurance (health) – prescriptions – doctor & dental visits
• Savings and Investments 10% – Retirement – stocks – bonds – mutual funds – cash reserves – rental income – royalties – art – etc.

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!

When you think about the fact that more and more people are getting into more and more debt all over the world, you can see why this is a problem that you need to be concerned about. Not only in the United States, household debt has topped the 2 trillion dollar mark, and this is actually without mortgage debt at all.

Whether you are in a situation where you need to worry about debt right away, or you are afraid you might be, you’ll find that debt consolidation is something that you are considering, but before you go ahead, you need to keep a few things in mind.

What Should Happen?

In a perfect world, debt consolidation means that all of your debt is moved to a single source, whether it is a credit card payment, a car payment a loan or a mortgage. You’ll find there are a number of different places to get this done, whether at your bank or online and you’ll find that the results promised, which include a lower interest payment, a lower monthly debt and overall, more money left over at the end of the month, is quite attractive.

This essentially allows you to save more money and to make your debts a great deal less urgent than they might have been initially.

What Really Happens?

In many cases, debt consolidation happens because people are not managing their money correctly and is considered a last case resort. Many people who consolidate their debts find that the initial freedom allows them to be even more careless and this can lead to a spending disaster. In these cases, getting a debt consolidated just leads to being even more deeply in debt.

For many people, the zero balances on their credit card are just too tempting and they might find that their credit has even been increased to a point where they will be even more tempted. For someone whose debt might have been caused by careless spending in the first space, this can lead to a situation that is even more difficult.

What Needs to Change?

When dealing with debt consolidation, you’ll find that you need to not only chance your finances, but also your spending habits. Make sure that if you have to consolidate your debts that you will do it in such a way as to put yourself ahead, and make sure that you will have the will power that is necessary to break any bad habits that you have picked up

Many people start this process by getting rid of their credit cards, and by putting a moratorium up on your loans. This can make sure that you don’t get more loans that will be burden on you and take a serious look at your finances. Make sure that you understand how you racked up the debt in the first place and make sure that you know how to stop before you go ahead and consolidate!

Conclusion

Remember that to make sure that debt consolidation works for you that you will need to change you spending habits which will improve your credit score. Over time, your debt should go down, not up, and you’ll find that reminding yourself of this can stave off further disaster.

Ideally, your debts should not eat up more than about 36% of your income. This is recommended, possibly even required if you want to consolidate your debt, so make sure that you plant this out an stick without it. With this ratio, you’ll find that you don’t need to to live paycheck to paycheck .

Remember that debt consolidation is not a magical solution that will get rid of your debt; it is a tool that will help you get debt under control!

Credit as a powerful tool. It gives you buying power, but without understanding how to use credit correctly, the use of a credit card in the wrong hands can be addicting. It makes going to the store dangerous.

It’s so important to understand how credit works, what credit is and how to manage credit as a part of a financial lifestyle. Making credit mistakes is easy – mistakes that in the end could cost you money each month.

No matter where you are in your financial journey, it is never to late to begin to learn more about credit, it’s use and how you can improve your management of credit.

Introduction to Credit

Some of us remember when paying at the checkout involved pulling out cash or writing a check. For more recent generations paying with a credit or debit card is what they know. Credit cards and their widespread use has only been popular since around the mid 1970’s.

When the credit card actually came into use does not matter. Those numerous small pieces of magic plastic tucked away in our wallet meant to us we could get anything we wanted – it was a substitute for cold hard cash. The fact is credit cards are not a substitute for cash – but a loan. It’s a loan you must pay back.

Credit – What Is It?

When you purchase anything on credit you are making a promise. It’s a promise of buy it today – pay for it tomorrow. Credit and access to it allows you to buy things when you do not have the cash available.

Read that statement again – It is key to learning and understanding how you use and control credit in your life.

"Credit and access to it allows you to buy things when you do not have the cash available."

Before a credit card company, bank or any kind of financial lender will allow you to tap into the wonder of credit, they first need to determine if you are a trusted party. A party who will repay the money or credit they have extended to you. They determine if you are “financially trustworthy.”

The financial community uses a variety of factors to make this determination. The most popular tool of factor is your credit report. A credit report is your “credit history” on how you have used credit in the past.

Lenders consider your history of credit to be a very good and clear indicator of how you will use credit in the future. Your credit report will include your past credit history and your current credit score.

For individuals starting to establish credit or have no credit history built yet, may find the lender looking at salary and how long you’ve been employed at a company. Lenders could ask someone with good established credit to to co-sign with you. This means both parties would be responsible for the credit.

How Does Credit Work?

To establish some form of credit along with a credit limit you’ll first need fill out an application to apply for a loan, credit card or whatever. The lender will take the information on the application do some research on your credit worthiness. Using your social security number they should be able to review your credit report and history.

Once they gather the information they can make a determination on your trustworthiness as a borrower. Once approved the lender will decide how much credit to extend and terms like interest rate, payment schedule, late fees and any other cost associated with using the credit.

Lenders usually set a maximum credit limit you can access all based on your credit history. If you exceed the credit limits in most cases a monetary penalty is accessed.

Once credit has been extended lenders will provide billing statements detailing:

• Purchases made
• Payments or credits
• Interest charged
• Late payment charges
• Minimum payment to be made
• Due date of payment

Credit is a big part of most of our lives. Knowing how it works, how you can build and maintain a good credit rating and how to use credit wisely is all a part of your financial health.

How’s Your Credit Health?