The July 4th holiday, commemorating the date on which the American colonies declared their independence from England, could be a fitting date for you to make your own declaration of financial independence—a pledge to get yourself out of credit card debt.
Although credit cards are great to have for shopping and online bill paying and financial emergencies, it’s all too easy to let your account balances climb too high. If you make only the minimum payments on your credit card bills every month, it could be years before you’re out of that debt. You can get to a point where your whole paycheck is going to cover the costs of purchases you made months or even years before.
Make a resolution to break free of that debt cycle on this Independence Day! Here are some tactics that can help you win your war for financial independence.
You can’t proceed with your plan for independence until you’ve assessed the situation—the total amount of credit card debt that you owe. Make a list of all your account balances and determine what interest you’re paying on each card.
At this point, you have a few options on how to proceed. The one that most financial experts prefer is that you continue to pay the minimum balance on all accounts each month except for the one with the highest interest rate. Put any extra money you can towards paying off that card. When you’ve reduced its balance to zero, put the additional payments toward the credit card with the next highest interest rate.
If the interest rates on your accounts are similar, you can also consider paying off the account with the lowest balance first. It can be a psychological win when you see that you’ve actually managed to eliminate your debt on at least one card, and may give you the incentive you need to do the same on other cards.
Another important step is to set up a budget. Find ways to reduce your spending so that you have more money to put towards paying down your debt. Sticking to a budget will help ensure that you won’t get into the same debt problems again.
If you already have too much credit card debt, it would seem that the last thing you want to consider is opening another credit card account. But it can actually be a good strategy if you can find and qualify for the right card.
Many banks offer balance transfer credit cards that offer zero interest or very low interest rates for six months, a year or even longer on any debt that you transfer to that card. You can transfer some or all of your debt to that card, then take the money you save by not paying interest and apply it towards reducing the transferred balance.
But don’t use the card to make new purchases! The low rate of interest may not apply to new debt—and the idea is to reduce the amount you owe, not add to it.
You’ll have to make some sacrifices in your struggle to earn financial independence, and that includes curbing your spending. Put most of your credit cards away, and keep only one to use only in the event of a real emergency. (Neither a sale at your favorite clothing store nor your daily trip to Starbucks qualifies as an emergency.)
It took eight years for the American colonists to win their war against Great Britain, but we’ve been enjoying the benefits of that victory for more than 200 years. Once you’ve won your battle over credit card debt, you’ll be able to enjoy long-term benefits as well, including the freedom to build a better financial future.