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My Best Financial Tip: How to Prevent & Eliminate High-Interest Credit Card Debt

By David Bakke

credit debtThere are so many components to prudent money management that it’s difficult to determine which is the most important. However, there is one thing that virtually everyone deals with, and it can make or break your finances. Whether it’s to buy a new home, afford a college education, or spend a day at the mall, acquiring debt can help you do things when you don’t have the requisite cash on hand.

But as we all know, borrowed money doesn’t come free – there’s an interest rate attached. And while borrowing money at low rates can help your dreams come true, racking up debt at high interest rates can dash those dreams and take away everything you’ve worked so hard for. For this reason, avoiding and eliminating high-interest debt may be the grand daddy of all financial management tips.

Steps to Eliminate High-Interest Debt

Carrying some low-interest debt is okay as long as you’re investing in yourself and your future and you can afford the payments. Going to college or purchasing a home are two examples of worthwhile debt. On the other hand, high-interest credit card debt is something that is never beneficial.

If you’re trapped in a debt cycle, escaping it may require anything from adjusting a few habits, to making a major lifestyle change. It may be easy, or it may be difficult, depending on who you are and what you’re accustomed to – but it’s always worth it.

For example, I recently paid off over $30,000 in credit card debt in less than three years. I did it by following a few simple steps:

  1. Review Bank Statements. Review your bank account and credit card statements for unnecessary purchases. For example, buying a new winter coat this year when you already have two in the closet would qualify as an unnecessary purchase. Lunches and dinners out, daily cappuccinos, and even lottery tickets are all purchases you can eliminate. When it comes to paying off old debt and avoiding new debt, every little bit counts. If you can manage to reduce monthly expenses by a mere $50, that’s $600 extra per year you could use to reduce debt, save, or even spend.
  2. Reduce Monthly Bills. Take a look at your cell phone plan, your cable TV package, and every other service for which you pay a regular bill. Search for ways to reduce your usage, and stop paying for services you don’t use. For example, you might consider dropping your 1,000 channel TV package in favor of a subscription to Netflix, Hulu, or Amazon Prime. Furthermore, if you have an unlimited cell phone plan but don’t use many minutes, downgrade to a cheaper plan. You may even want to drop your landline and use your cell phone exclusively. If you comb through all your bills, you’re bound to find ways to cut down your monthly expenses, which means more money to reduce your debt and interest payments.
  3. Do the Math. Add up all the money you can save each month, and designate that amount towards your credit card balances. Then, determine how long it will take you to be debt-free. Also, plan to reward yourself when you reach certain milestones. Keeping yourself motivated is key to eliminating high-interest debt.
  4. Be Aggressive. To speed up the process, be aggressive about saving. Clip coupons for groceries, adjust your thermostat, and be diligent about turning off lights when not in use. Once these measures are in place, add savings to your planned payments to pay your debt down even faster.

Identify everything you pay money for as a “want” or a “need.” Reduce what you pay for “needs” whenever possible, and eliminate as many “wants” as you can. The more superfluous expenses you can eliminate, the quicker you’ll climb out of debt.

never take on more debt than you can afford

Avoiding Future High-Interest Debt

Once you pay off your debt, keep the momentum going by continuing your good habits. Your savings will only accumulate, and you may be able to indulge yourself on occasion. After all, the key is moderation, not total sacrifice.

The most important rule to keep in mind regarding credit card use is that if you can’t afford to pay off a purchase by the end of the month, you can’t afford it. Rest assured, the more your savings grow and your debt dwindles, the more money you’ll have. Keeping debt down may also improve your credit score, which will in turn qualify you for lower interest rates on debt you do incur.

When it comes to major purchases, such as a car or a new computer, apply the same want/need analysis as you would for everyday purchases. For example, if you have a car that’s still running, but are simply accustomed to getting a new one once it’s paid off, rethink your approach. Instead, drive your car for longer to save cash for a new one. Life without a car payment can be wonderful, and you might find you never want to go back.

However, in order to achieve this and other goals, you’ll need two things: a personal budget and an emergency savings fund. A personalized monthly budget helps you monitor spending, and an emergency fund with at least six months worth of living expenses prevents you from needing to break out the plastic in the event of a major car repair, medical bill, or lost job.

Final Word

High-interest debt may be the worst kind, but any debt is a burden. If you already have substantial student loans, see if you can become eligible for debt cancellation or forgiveness programs. Also, try consolidating private student loans to reduce the interest rate. If you have a mortgage, but no home equity, don’t assume a refinance is out of the question – if the first lender you talk to says no, get a second and even third opinion to make sure there aren’t programs for which you qualify.

As you reduce your overall debt burden and interest payments, it will become easier to avoid taking on new high interest rate debt. But it does require a little sacrifice. The next time you’re ready to pull out the plastic or sign on the dotted line, just remember that accumulating debt is so much easier than paying it off – and ask yourself if it’s worth it.

What other ways can you think of to eliminate interest payments from your life?

David Bakke
David started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called "Don't Be A Mule..." Since then he has been a regular contributor for Money Crashers. He lives just outside Atlanta, GA and most all of his free time is taken up by his amazing three year old son, Nicholas.

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  • John@TheMoneyPrinciple

    Undoubtedly credit cards can get you into trouble but they can also be useful if used wisely. For example our main card includes excellent travel insurance. It is also possible (at least in the UK) to do balance transfers for up to 23 months on some new cards. This costs a 3% premium but hey – that’s like 1.55% a year. Or even do a money transfer direct into a standard bank account. Using that sort of facility can help but it does need to be handled properly and not just splashed out on the latest HDTV!

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